Pakistan Economic Woes Worsen

Five months before the general elections, Pakistan Muslim League-Nawaz’s government is struggling to fix the failing economy.

The finance managers attempted to bring discipline by currency devaluation in December and by raising taxes in October to curb rising imports. Despite these moves both current account and trade deficits are hitting records while foreign exchange reserves continue to fall, Bloomberg stated in a recent analysis of Pakistan’s state of economy.

Pakistan’s external sector indicators “signal a crisis and are going from bad to worse,” Uzair Younus, a South Asia director at Washington-based consultancy Albright Stonebridge Group LLC told Bloomberg.

“With elections around the corner, the government will simply kick the can down the road. The next government will face a balance of payments crisis and most likely go to the International Monetary Fund for yet another bailout,” he said.

The nation’s imports rose to a record last month despite the government increasing taxes on more than 700 items in October. With the tax on almost half those products reversed this month, the import bill remains under pressure.

Bloomberg reported that the economy is growing at 5.3%—the fastest pace in a decade—with import demand fueled by China’s financing of power plants and road projects under the China-Pakistan Economic Corridor.

The current account deficit has continued to widen after currency devaluation in December, putting further pressure on the rupee and pushing authorities to borrow more. The current account gap reached 4.7% of gross domestic product in the seven months ending January, compared with 3.5% a year earlier.

Pakistan’s foreign exchange reserves have continued to decline after the last IMF loan program ended in September 2016. But now, according to the report, economists are predicting that Islamabad will need a bailout package later this year to shore up its finances.

The State Bank of Pakistan unexpectedly increased its interest rate for the first time in more than four years last month. The SBP chief Tariq Bajwa said the regulator is “pre-empting signs of the economy overheating and trying to keep inflation under control.”

Pakistan’s financial risk in January rose the most since Bloomberg started compiling data in 2015. Pakistan’s benchmark stock index has dropped 18% since a peak in May last year with foreigners selling shares after the country was upgraded to emerging market status by MSCI Inc.

Political turmoil following the ousting of former prime minister Nawaz Sharif in July spurred further drops, it said.