Earlier this month, Moody’s Investors Services highlighted Pakistan’s susceptibility to balance of payment (BoP) crises, citing its lowest level of exports at 10.5 per cent of Gross Domestic Product (GDP) among South Asian countries.[1] According to the agency’s report titled ‘Sovereigns – South Asia, Low trade openness fuels vulnerability to shocks and curbs growth in the longer run,’ Pakistan stands out as one of the most vulnerable economies among the four sovereigns assessed in the region.[2] These vulnerabilities reportedly stem from substantial pressures on the balance of payments due to exceptionally low levels of exports and foreign direct investment (FDI), coupled with weaker policy management and heightened political risk.[3] In contrast, India emerges as the least vulnerable economy in the region.[4]
The Moody’s report underscores that Pakistan’s low trade openness and limited diversification in its export portfolio, coupled with weaker macroeconomic policy management and higher political risks, have led to diminished foreign exchange reserves, limiting Islamabad’s capacity to absorb economic shocks. In South Asia, Pakistan and Bangladesh exhibit the lowest levels of exports, accounting for 10.5 per cent and 12.9 per cent of their respective GDPs.[5] Sri Lanka and India, with more mature service export sectors, demonstrate higher exports at 21.5 per cent and 22.4 per cent of GDP, respectively. Ironically, Pakistan’s export potential stands at about six times its current export volume. Meanwhile, Bangladesh, India, and Sri Lanka have export potential ranging between two to three times their current export levels.
Moreover, high domestic political risks disrupt policy formulation, dampening Pakistan’s capacity to attract foreign direct investment (FDI) necessary for building and maintaining adequate foreign exchange reserves. The report suggests that low influx of FDI in Pakistan limits its involvement in global value chains. Over the period from 2013 to 2022, Pakistan experienced net inflows of FDI averaging around 0.6 per cent of GDP.[6] In the fiscal year 2022-23, Pakistan’s credit profile underwent significant deterioration. Global financial conditions tightened in the aftermath of the COVID-19 pandemic and unstable domestic political conditions, led to rapid expansion of Pakistan’s current account deficits and substantial declines in foreign exchange reserves.
The caretaker government in Pakistan has recently announced that the country’s economy saw a contraction during the last fiscal year under the previous Pakistan Democratic Movement (PDM) coalition government. The revised gross domestic product (GDP) estimates reflect Pakistan’s challenging economic circumstances, which contradicted the previous assertion of achieving a growth rate of 0.3 per cent in the fiscal year that ended in June 2022.[7] The revised growth of GDP for the year 2022-23 is negative 0.17 per cent against the provisional growth of 0.29 per cent. It is worth noting that several economists, as well as global financial institutions like the World Bank and the International Monetary Fund (IMF), had previously contested the 0.3 per cent provisional growth projection declared by the PDM government. This situation is not new; Pakistan has previously attempted to present inflated economic indicators, providing GDP figures that did not align with signals and indicators indicating a different reality.
For the current fiscal year, the Pakistan government has set a 3.5 per cent economic growth target but the IMF has revised downwards its projection to 2 per cent because of the prevailing financial crisis.[8] [9] Based on previous governments’ dubious performance record, it is likely that the current caretaker set up in Islamabad is also hyping the GDP numbers. It will also fail to achieve any major economic success until the next general elections in Pakistan, which is slated to take place in February 2024.[10] Under Pakistan Army’s control, the current political set up in Pakistan is trying hard to stabilise the economy. So far, it has not achieved anything substantial to improve the growth rate besides few financial agreements with known friendly countries. On the contrary, domestic industries in Pakistan are in complete shambles and the food inflation continues to remain in the double digit.
Last month, Pakistan’s two major automotive industry players, Honda Atlas Cars and Pak Suzuki Motor Company (PSMC), announced a “temporary shutdown” of their production plants due to an ongoing shortage of essential raw materials.[11] Similarly, a wide range of other industries, including auto parts manufacturers, and companies’ dependent on imported raw materials in Pakistan, find themselves in a similar predicament.[12] According to the National Accounts Committee (NAC) figures, the industrial sector in Pakistan has been worst hit in the last financial year with an estimated contraction of 3.8 per cent.[13] Pakistan saw its foreign exchange reserves plummet to a low of USD 3.1 billion, barely covering a month’s worth of imports.[14] However, reserves have since slightly improved after the announcement of the IMF’s Stand-By Arrangement (SBA) to Pakistan on June 29.[15] While downgrading Pakistan’s debt ratings to Caa3 from Caa1, Moody’s Investors Service said in February, “weak governance and heightened social risks impede Pakistan’s ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments.”[16]
[1] https://www.brecorder.com/news/40272569/south-asian-sovereigns-pakistan-most-vulnerable-to-bop-crises-moodys
[2] https://www.arabnews.com/node/2406386/pakistan
[3] https://www.investmentmonitor.ai/news/pakistan-us-call-for-fdi-increase/#?cf-view
[4] https://www.statista.com/statistics/620990/gross-domestic-product-growth-rate-in-south-asia-2017/
[5] https://data.worldbank.org/indicator/NE.EXP.GNFS.ZS
[6] https://tribune.com.pk/story/2448328/economy-actually-contracted-in-last-fiscal
[7] https://www.dawn.com/news/1793415/gdp-figure-under-pdm-rule-turns-negative
[8] https://www.reuters.com/markets/asia/pakistan-proposes-inflation-target-21-estimates-upcoming-fy24-budget-source-2023-06-06/#:~:text=Pakistan%20approves%203.5%25%20GDP%20growth%20target%20for%20FY%202023%2D24%20budget,-By%20Asif%20Shahzad&text=ISLAMABAD%2C%20June%206%20(Reuters),Planning%20Minister%20Ahsan%20Iqbal%20said.
[9] https://tribune.com.pk/story/2440482/imf-sticks-to-25-growth-forecast-for-pakistan
[10] https://www.adb.org/where-we-work/pakistan/economy
[11] https://www.timesofkarachi.pk/article/major-car-manufacturers-toyota-honda-and-pak-suzuki-temporarily-shut-operations-in-pakistan/2647
[12] https://www.thenews.com.pk/print/1120598-honda-atlas-pak-suzuki-temporarily-suspend-production-amid-supply-chain-crisis
[13] https://tribune.com.pk/story/2448328/economy-actually-contracted-in-last-fiscal
[14] https://www.cnbctv18.com/economy/pakistan-economic-crisis-state-bank-foreign-reserves-drop-alarming-level-yearly-15846481.htm
[15] https://www.imf.org/en/News/Articles/2023/11/15/pr23392-pakistan-imf-reaches-sla-first-review-9-month-sba#:~:text=“The%20IMF%20team%20has%20reached,of%20the%20IMF%27s%20Executive%20Board.
[16] https://www.brecorder.com/news/40228846