The optimism surrounding the Pakistan economy over the last year thanks to the massive infusion of Chinese investment and a surging stock market has quickly dissipated. The impact of the China-Pakistan Economic Corridor on Pakistan’s exports are still many years away from being felt but the import bill continues to rise while the Pakistan Stock Exchange has lost nearly a quarter of its value in the last five months. A more sober assessment of our future economic prospects is badly needed. The State Bank of Pakistan’s annual report provides a start. It notes the unsustainable budget deficit, predicting it will rise in an election year where nervous incumbents may discard fiscal probity to buy themselves victory. Our imports, more than half of which are on oil and consumer items, will keep outpacing exports. The SBP has correctly identified the pressures on the economy but is hesitant to suggest solutions. While a devaluation of the rupee would help ease our balance of payments deficit by making our exports more attractive, the government is hesitant to take such a step. Indeed, when it did devalue the currency earlier this year it earned a stinging rebuke from the government.
There is still some good news to be found in the State Bank report. That the rate of inflation is remaining steady while economic growth continues to be strong shows that the fundamentals of the economy are far from broken. One does wonder though if the SBP is being overly optimistic since the rising price of oil on the international market will cause an inflationary effect at home. CPEC was supposed to have a major impact on our exports but most of the projects associated with it are not yet up and running and we need to import increased oil to complete them. That means Pakistan is overly reliant on remittances – which have a tendency to fluctuate wildly from year to year – to reduce the current account deficit and maintain foreign exchange levels. The buoyancy of last year, when Pakistan’s stock market was among the best performing in the world and CPEC money was pouring in, has been replaced with sobering reality. We may not be in danger yet but the State Bank report should be seen as the first warning.