Finance: Distilling differences into a common vision

Pakistan’s external sector is in trouble. Growth in exports is losing steam, and imports are growing, expanding the trade deficit. The country’s imports of goods in December 2024 crossed $5 billion for the first time in two years and reached $5.29bn, depicting a big 14 per cent year-on-year increase. On the other hand, exports of goods totalled $2.84bn with only a 0.67pc annualised growth. The monthly trade deficit soared 34.8pc on-year to $2.44bn.

This indicates that the current account surplus may soon start shrinking. Overall balance of payments is already negative and if the promised foreign investment does not come in time or if foreign funding dries up, it may expand further. The rupee remained strong in the first half of this fiscal year (July-December 2024), but it may start losing strength gradually.

The State Bank of Pakistan’s foreign exchange reserves have also begun to fall due to external debt servicing. These reserves of $11.7bn, equivalent to just two months of imports, are not large enough to embolden the central bank to intervene in the forex market in case of the rupee’s decline — which the International Monetary Fund (IMF) will not allow either.

The hybrid regime doesn’t want to let the trade deficit widen, but the room for boosting exports is limited amidst the rising cost of production and weak demand for Pakistani products in major export markets.

The country’s internal issues paired with potential external challenges merit a charter of economy as emphasised by the finance minister

The treatment of PTI by the hybrid regime and gross violations of human rights also threaten preferential treatment of Pakistani exports in the European Union while Donald Trump’s inauguration as the US president on Jan 20 poses additional challenges for increasing exports to the US market.

Imports, meanwhile, cannot be contained this time through tariff or non-tariff measures as Pakistan managed to do before signing a $7bn loan agreement with the IMF in July 2024. The IMF has clearly communicated that under its current $7bn funding programme, this cannot be done.

Home remittances that grew impressively in the first half of this fiscal year may also witness slower growth in the second half due to changing economic and labour market conditions in the main host countries (Saudi Arabia, the United Arab Emirates, the UK and the US).

A slower growth in remittances combined with an increasing trade deficit will test the rupee’s resilience even more if Pakistan fails to get Chinese funds rolled over. The country had secured these funds earlier to avoid default. The monetary easing of the recent past is also going to keep the exchange rates under pressure by making import financing cheaper and causing a decline in the return on rupee-based financial assets.

Overall economic growth in Pakistan in July-September this year remained too slow — just 0.92pc — primarily due to a contraction in industrial output, and the manufacturing sector is still struggling. The resultant rise in joblessness is making it difficult for financially challenged individuals and households to celebrate the fall in headline inflation to a record 81-month low of 4.1pc in December.

Since inflationary pressures have subsided partly due to a decline in aggregate demand, evident from slow economic growth in the first quarter, an uptick in inflation cannot be ruled out if economic recovery accelerates on the back of favourable outcomes of the ongoing efforts to attract foreign investment and spur domestic demand.

The geopolitical complexities Pakistan is currently facing cannot be overstated. With Donald Trump in the White House, Israeli aggression in the Middle East, and ‘do-more’ demands coming from China regarding security present complex challenges.

The growing involvement of the establishment under the hybrid regime’s governance remains a subject of debate, though political parties seem to have accepted this phenomenon. However, the length of time these political parties, particularly the main opposition party PTI, will support this governance model is unpredictable.

Under these circumstances, Finance Minister Muhammad Aurangzeb’s emphasis on the need for a charter of economy is no surprise. For years, the establishment has been pressing politicians to sign a charter of the economy to ensure the continuity of economic policies and reforms.

The events of May 9, 2023, and November 26, 2024, and the resurgence of militancy and terrorism in Khyber Pakhtunkhwa and Balochistan that threaten the foreign investment regime make the need for such an agreement more obvious.

The economic gains made in 2024 in terms of lower inflation, reduction in the cost of domestic debt servicing, increase in tax revenues and removal of some anomalies in electricity and gas pricing have set the stage for second-tier reforms.

However, those reforms targeting sustainable economic growth in the medium term and fuller exploitation of national resources would go nowhere unless all stakeholders, including political parties, businesses, industries, and the establishment, do not jointly produce a roadmap acceptable for all.

Published in Dawn, The Business and Finance Weekly, January 6th, 2025