The government must realize that imbalances in external accounts cannot be financed sustainably by foreign remittances
With two years under its belt, the Pakistani government of Tehreek-e-Insaf (PTI) has decided that the task of stabilizing the boat, a job it conceded after taking the reins in 2018, was now over. It was time to give up its hawkish clasp, and perhaps more importantly, its reputation. A new economic configuration has been installed, an expansionary budget established and growth promised. The ruling party was now preparing for its next election campaign, and if any macroeconomic sacrifices had to be made, the cost seemed worth bearing.
However, these aspirations seem to have come to an abrupt end. The economic scenario has shifted with such ferocity that even the most adamant optimists have come back recommending caution. Two months after the start of FY22, the current account deficit (CAD) has already exceeded its annual balance for FY21 by more than 25%. Less than six months after becoming the best-performing currency in the world, the PKR is now the worst-performing currency on the continent, hitting an all-time low in September. Pakistan’s economic team, despite its categorical assurances, is now in the spotlight to limit growing imbalances in external accounts. A difficult company, especially in the context of its direction of politically significant growth.
In what has proven to be a recurring theme during its three-year administrative tenure, the PTI government appears to have misjudged the basic details of the plot. And much like its predecessors, and despite demands for structural reform, the government has essentially neglected the fault lines in the foreign trade paradigm. He seems to have forgotten his own mantra of prioritizing a sustainable external account position over unsustainable consumer-led economic growth. By pushing for growth without first tackling the underlying imbalances in the country’s trade balance, the PTI practically sanctioned a return to the catastrophe of the external account from which it promised to save Pakistan.
One of the major problems in Pakistan’s business environment is the country’s heavy dependence on imported energy. This dependence not only makes the country extremely vulnerable to macroeconomic shocks resulting from the changing dynamics of the international energy market, but also results in a distortion of the growth base. A growth spurt almost necessarily leads to escalating inflationary pressures, without financing capital imports. In the first two months of FY22, imports of petroleum products increased by more than 86% while imports of machinery increased by less than 20%.
Whatever room for maneuver offered by healthy growth in worker remittances since the emergence of Covid-19, it has been consumed by a sharp rise in international oil prices. Oil imports are the largest import group, contributing over a fifth of the import bill. And even within oil imports, more than 50% of imports are in the form of refined products resulting in a more pronounced impact of soaring oil prices. That sustainable economic growth cannot be achieved without changing the coefficients of this equation therefore seems inevitable.
Pakistan’s economic policy-making, however, ignored any consideration to address this imbalance-inducing dynamic, opting instead for consumption-oriented growth. Vehicle imports increased by over 165% in the first two months of FY22. This shouldn’t come as a surprise, of course. The reconstitution of the energy mix and the realignment of oil imports require a long-term commitment which does not necessarily have immediate political value for the incumbent operators.
While the country’s policymakers intend to create a growth equation that is not only sustainable, but also does not inadvertently trigger external account imbalances, they must nevertheless undertake comprehensive reforms involving restructuring of energy infrastructure. The country must prioritize the abandonment of non-renewable energy sources that require a volatile load of imports. It should also ensure, perhaps through public-private partnerships, that the inevitable imports of petroleum are not directed towards refined, value-added products.
The government needs to understand that external account imbalances cannot be financed sustainably through foreign remittances, aid and debt. Pakistan must move towards a viable balance of the trade paradigm. And while export-oriented policies may be needed to improve the equation, structural disparities on the import side should not be overlooked. Policymakers need to understand that while exports can be improved through favorable regulatory interventions, the country’s economic growth potential should not be left unnecessarily exposed to external shocks.