Pakistan Economy in Limbo

In the present uncertain financial and political situation, it is certain that Pakistan government will seek foreign aid and loans for survival. According to informed sources in Islamabad, the government wants to acquire financial strength before the July 25 general elections.

Sources quoted economic pundits in the government as suggesting that the current account deficit can be stabilized by using rapidly dwindling foreign currency reserves, ANI reported.

There is growing speculation that the government will have to seek a loan package from the International Monetary Fund following the elections, for the second time since 2013, amid fears of being faced with a balance of payments crisis.

Caretaker Finance Minister Shamshad Akhtar told a press conference in Islamabad on Tuesday that the government has to finance the trade deficit gap of $25 billion.

The announcement came hours after the State Bank of Pakistan devalued the rupee by 3.7%, the third devaluation since December. It is also saddled with a heavy public debt—70% of GDP, according to Akhtar—along with a yawning fiscal deficit.

  China Connection

The economy grew by 5.8% during 2017-18, missing a government target by 2%, according to documents from the finance ministry. Plagued for years by a Taliban insurgency, it has been battling to get its shaky economy back on track and end the energy crisis crippling industry.

The growth in GDP comes amid structural reforms, an improved energy sector and China’s ambitious multi-billion dollar infrastructure project—the China-Pakistan Economic Corridor—linking its western province of Xinjiang to the Arabian Sea via Pakistan. However, fears remain about Pakistan’s ability to repay the Chinese loans, with much of their terms shrouded in secrecy.

The Pakistani rupee slumped 3.8% against the dollar on Monday before slightly recovering in what appeared to be the third currency devaluation in seven months by the central bank amid a balance of payments crisis.

The rupee drop threatens to squeeze consumers, coming just days before Eid-ul-Fitr and ahead of the July 25 general election.

In December and March, the rupee was devalued, each time by about 5% by the central bank. Pakistan’s economy is expected to expand by close to 6% this year, the fastest pace in more than a decade, but a widening of the current account deficit has brought new worries.

The current account deficit now stands at $14 billion, around 5.3% of gross domestic product, an SBP official said.