0526 GMT February 24, 2020
While addressing the World Economic Forum at Davos in January, Prime Minister Imran Khan claimed that the year 2020 will be one of economic growths for Pakistan. Khan’s words echoed his vows to the domestic audience, as he has promised fiscal “development” in the country within the ongoing calendar year.
After a tumultuous first 12 months since the Pakistan Tehreek-e-Insaf (PTI) government took over in August 2018, the fiscal positives for the country have indeed been tangible in recent months.
In September, Pakistan’s current account deficit dropped by 80 percent to a 41-month low of $259 million, with a 111.5 percent rise in foreign direct investment (FDI) and 194 percent increase in private investment. With FDI of $1.34 billion during the first half of the current fiscal year, a 68.3 percent increase was registered in January, compared to $796.8 million of the same period of the previous fiscal year.
This month, the reserves of the State Bank of Pakistan (SBP) also hit a 21-month high at $11.586 billion. The economic positivity was also reflected by the Karachi Stock Exchange (KSE), which registered a 16-month high this month, crossing the 42,000 point mark after a cumulative increase of 13,000 points in four months.
The financial developments in Pakistan have been duly recognized globally as well, with Moody’s Investor Service upgrading Pakistan’s economy outlook from negative to stable in December. The World Bank has also acknowledged Pakistan as one of the top 10 “most improved” countries in the Ease of Doing Business Index.
While there are positives aplenty, almost all of them have come in the aftermath of Pakistan reaching a 13th bailout agreement with the International Monetary Fund (IMF) in July last year. The agreement was designed to address a multitude of macroeconomic imbalances spearheaded by a balance of payment crisis.
The PTI government was much criticized for taking over nine months to go to the IMF. Finance Ministry officials revealed at the time that the initial plan under former Finance Minister Asad Umer had been to seek aid from other countries instead of approaching the Fund, for which a Finance Bill was also passed 12 months ago.
The delay meant that by the time the government implemented an IMF instructed market-driven currency exchange rate, the Pakistani rupee had already lost over 50 percent of its value against the US dollar. However, in the six months since the IMF bailout agreement, the Pakistani rupee-US dollar exchange rate has eased from around 165 to the current 155.
While the government’s delayed response aggravated the currency exchange crisis, financial analysts argue that its foundation were laid by the previous Pakistan Muslim League-Nawaz (PML-N) government, whose Finance Minister Ishaq Dar had kept the Pakistani rupee-US dollar exchange rate artificially afloat around the 100 mark.
“There has been an annual five percent depreciation for the rupee against the [US] dollar since at least the 1970s. Whenever you artificially fix the value — like [former Prime Minister] Shaukat Aziz fixed it around 60-65 or Dar at 100 — that depreciation isn’t allowed. And when you do that, the currency rates snaps back into its actual place [after the period of artificial valuation],” Financial Analyst at FX Empire Shahab Jafry said.
“Currency markets work on trends and sentiments. This snap forms a self-fulfilling prophecy, which generates a multiplier effect. And as a result we have seen the [Pakistani] rupee fall over 40 percent and not the 20-25 percent it would have fallen over the previous four to five years,” he added.
While the IMF-dictated policies have steered the economy toward macro corrections, the impact on the masses has been especially jarring. Furthermore, the abovementioned delay in agreeing to the IMF terms meant that by the end of August 2019, inflation had hit an 87-month high of 11.6 percent. January saw a 12-year high inflation rate of 14.6, which the State Bank of Pakistan declared “transitory.”
The IMF conditions, coupled with the government’s negligence leading up to the bailout, continue to take their toll on the masses with persistent increase in prices of gas, power, and fuel. Furthermore, while inflation has caused a hike in the prices of commodities and food items, mismanagement has seen shortages of basic dietary ingredients like tomatoes, wheat, and sugar.
The state has attempted to address the inflation through the SBP maintaining a high policy rate at 13.25 percent, providing the increased interest rate as a savings incentive for the masses. However, critics argue that with the inflation being cost-push and not demand-pull, the enhanced rate won’t suffice in addressing it. Furthermore, the high interest rate is attracting overseas investment in treasury bills.
*Kunwar Khuldune Shahid is a Pakistan-based correspondent for The Diplomat.