Year 2023 was challenging for Pakistan. The inflation rate skyrocketed to almost 30%, while the real GDP growth rate, as reported by the International Monetary Fund’s World Economic Outlook Database, was -0.5% in 2023.
It was the only time, apart from the Covid-19 impacted 2020, that Pakistan reported negative growth in GDP in constant prices since 1980 according to the WEO. The GDP at purchasing power parity only grew marginally in 2023, given that it had increased almost 50% between 2017 and 2022.
The current account balance, which reported a deficit of $17.5 billion in FY22, recovered to a deficit of $2.2 billion in FY23. The trend has continued in the first five months of FY24, as a deficit of $1.2 billion has so far been reported, with a surplus of $9 million reported in November 2023.
High inflation coupled with a low current account deficit indicates a slowdown in economic activities. The government reduced import demand. This may have curtailed the current account deficit but has created challenges due to high rates of inflation.
According to the data extracted from the State Bank of Pakistan, the foreign exchange reserves held by SBP had declined to $7 billion at the end of November 2023 from a peak of $8.1 billion in July 2023. The conditions were in dire straits at the start of the year when it had collapsed to $3.1 billion.
Pakistan had approximately $20 billion worth of its loans maturing in one year at the end of October 2023. This had peaked at more than $26 billion at the end of October 2022.
However, the pressure on the external front at the end of 2023 is lower than it was at the end of 2022, as the IMF has provided Pakistan with a much-needed lifeline in mid-2023.
As Pakistan will likely negotiate a new financial package with the IMF post-elections in February 2024, the need for economic stability will be increasingly important.
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According to the Business Confidence Index reported by SBP in collaboration with the Institute of Business Administration, Karachi, the confidence has recovered into the near positive zone from one of the lowest levels reported in recent years, post Covid-19.
Business confidence performed poorly in the earlier months of 2023 but has recovered in the last quarter. It is necessary to ensure that business confidence continues to remain positive as policymakers strive to ensure a more sustainable economic environment.
The current account deficit is primarily driven by the trade deficit. The trade deficit in goods in FY22 was $39 billion, which dropped to $24 billion in FY23. The deficit decreased by $4.5 billion in the first five months of FY24 compared to the same period of the previous fiscal year.
However, remittances have also decreased while the deficit in services has increased over the same period. Hence, the current account deficit was only $2 billion less over the same period. The fact that different components that define the balance-of-payments fluctuate differently makes economic forecasting more challenging.
One of the major drivers of the trade deficit is the payments made on fuel imports. The payments on fuel imports declined by more than $3 billion in the first five months of FY24 over the same period last fiscal year. Imports of transport equipment remained at lower levels in both FY23 and FY24.
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Although fuel imports were adversely affected due to the changes in fuel prices paid at the pump as the government increased them drastically in the previous year, it is essential to deregulate fuel prices in practice as well as cheaper fuel not only increased import dependency but also likely lowered the rate at which investments in alternative energy sources could have been pursued to lower the overall import bill in the longer run.
Second, to encourage improved efficiency in the economy it is essential to boost digitalisation of the cross-border trade processes and procedures. Pakistan has improved significantly on the UN Global Survey on Digital and Sustainable Trade Facilitation as it introduced the Pakistan Single Window last year.
The digitalisation of trade processes helps not only reduce trade costs but also encourages smaller businesses to participate in international trading activities that would otherwise be discouraged from the burdensome physical processes and documentation involved in trading activities.
Third, it is recommended that Pakistan must pursue trade negotiations with major regional players to encourage exports. The Regional Comprehensive Economic Partnership (RCEP) brings in a new evolution in trade agreements, with the largest economies in the Asian region as its signatories.
The trade agreements negotiated by Pakistan are now outdated as the newer and deeper agreements go beyond the scope of the World Trade Organisation to improve trading relationships between the member countries.
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They involve agreements on developing small and medium-sized enterprises, involve capacity-building programmes, and other agreements that make trade between the member countries more sustainable in the longer run.
Not only the lack but the poor implementation of the trade agreements may lock Pakistan out from achieving its export potential as larger trading countries pursue their own regional blocs.
Lastly, it is imperative that policies are introduced with the needs of the consumer in mind, particularly in providing them with competitively priced quality-adjusted products. Rather than providing carrots and incentives to producers through subsidies and tariff protection, businesses must be encouraged to compete not only domestically but globally as well.
Their improved ability to compete through measures that build capabilities and foster innovation will help generate exports. Unfortunately, the inward-looking agenda of policymakers has created an anti-export bias, which favours less competitive businesses serving only the domestic market with high-priced and low-quality products. This has adversely impacted the ability of businesses to become not only competitive internationally but also domestically.
This new year will bring great challenges for Pakistan but can also set a direction for longer-term reforms. It is imperative that the uncertainty is not only reduced on the economic front but also on the political front to improve the overall economic conditions in Pakistan.
