Pakistan's moribund economy is showing ‘signs of recovery’. So claims the nine-month-old Nawaz Sharif government. Indeed, some indicators of economic health have shown improvement.

The output of large-scale industry has increased by 6.8pc on improved energy supplies to Punjab’s factories; private credit has risen from Rs53bn in the first half of the last financial year to Rs231bn, with the government claiming that much of it was for fixed investment; machinery imports are up by a hefty 26pc; overseas workers’ remittances have spiked by over 10pc to $9.03bn in seven months to January.

Tax collection registered a 17.2pc rise to reach Rs1.197 trillion; exports have also slightly grown; and inflation has decelerated.

The government says the economy expanded by more than 5pc in the first quarter of the present fiscal year. The State Bank of Pakistan (SBP) agrees, but says the overall gross domestic product (GDP) growth will be in the range of 4-5pc.

The International Monetary Fund has also upgraded its GDP growth estimates to 3.1pc from its previous forecast of 2.8pc after the second quarterly review of the country’s economic performance under its $6.7b Extended Fund Facility. Other multilateral lenders are also optimistic about higher-than-estimated growth.

The corporate sector is also upbeat about growth prospects, as manufacturers report an increase in new orders. The first Purchasing Manager Index (PMI) launched by MCB Bank last week, which is based on a survey of 200 small to large industries across Pakistan in January, depicts improvement in business confidence. The PMI, which is used to assess the direction of economic growth in the near-term the world over, says the economy is growing and creating jobs.

Conversations with several businessmen based in Lahore, Faisalabad and Karachi endorse the findings of the PMI survey. But many of these were worried over the increase in energy shortages going forwards, as well as higher cost of credit and deterioration in security conditions in the wake of the breakdown in peace talks between the government and the Tehrik-i-Taliban Pakistan.

Some, nevertheless, say they are planning to invest in small solar and coal power generation plants because of higher margins on investment.

Yet, in spite of these ‘improvements’, some analysts believe that it will be too early to say that the decline in the economy has been arrested. “There are a number of challenges that the government needs to surmount,” says Shahid Zia, a Lahore-based financial analyst.

“We are still not sure if the government will be able to bridge the fiscal deficit, which the central bank says will remain well above the budgeted target of 6pc, despite significant cut in the development expenditure and increase in [indirect] tax collection. It all depends on the successful sale of 3G and 4G mobile phone spectrums and increase in foreign official and private inflows.”

He is not alone. A senior banker says foreign flows are crucial to reducing the fiscal and current account deficits. He says Ishaq Dar, the finance minister, had ‘talked down’ the rupee for now, but exchange rate stability is not sustainable unless the country’s foreign exchange reserves grow significantly and inflation comes down.

“You cannot artificially keep the exchange rate in control for long when your reserves have bottomed out and inflation is far above what is experienced by your trading partners.”

Some also do not see foreign or domestic investors starting to invest in the economy in a big way in the near-term. “Investment is declining,” says Ali Salman of the Islamabad-based think-tank on the market economy, the Policy Research Institute of Market Economy (Prime).

“Chinese investors have committed investment of billions of dollars in large infrastructure projects and in the manufacturing industry over the next several years, but all these promises are yet to materialise.”

People like Dr Ishrat Hussain, who as SBP Governor in the early 2000s oversaw massive domestic and foreign direct investment in the economy, cautions against forming an opinion on the basis of growth estimates of the government or recent improvements in economic fundaments. As long as we have hard data on which the government’s estimates are based, he argues, it will not be wise to make an opinion.

However, Dr Hussain, who is running the Institute of Business Administration in Karachi, says huge opportunities for investment exist, but delays in restructuring regulatory and service bodies and privatisation are adversely impacting economic expectations.

“People are waiting for the government to restructure regulatory bodies and public sector corporations to get a sense of the policy direction before bringing in their money. They’ve also put their investment plans on hold until the government starts privatising public corporations. Some of them may want to buy one of these businesses rather than invest in new projects.”