The economic recovery we currently see in Pakistan is weak and slow. Whether it can be strengthened and accelerated depends as much on politics as on economic policymaking.

Some signs of the economic recovery are obvious: the large-scale manufacturing (LSM) output has started growing, tax revenue collection is finally catching up with the target, the current account is in surplus, key crops are doing better, micro and smart lockdowns during the second wave of Covid-19 have averted business closures and the shutting down of key industries, remittances continue to grow in double digits, exports are crawling up and the main export-earning textile industry is performing well despite a plunge in the cotton output, the cement industry is producing more, the housing sector seems ready to take off, food and fertiliser production is also up, and consumer demand is rebounding.

But in each of the key areas of improvement except remittances, growth primarily reflects a low-base effect. In the last fiscal year, industrial and services sectors witnessed 2.7 per cent and 0.6 per ceny contraction, respectively, which led to an overall 0.4pc decline in GDP despite 2.7pc growth in agriculture. Exports had also fallen 6.8pc, according to the annual economic report released recently by the State Bank of Pakistan (SBP).

The PTI government is relying on foreign inflows for economic recovery

Ongoing political confrontation in the country amidst both perennial and immediate national security challenges makes it difficult for today’s hybrid democracy to ensure steady economic growth. Political instability caused by the stubborn attitude of both the government and the opposition continues to harm inter-provincial harmony — necessary for the economic development — and has widened communication gaps between the treasury and the opposition, depriving the economy of the national focus it requires for a strong recovery.

The nascent economic recovery is apparently weak in the absence or near-absence of supporting factors. The LSM output is increasing but gas shortages persist and may become even more pressing in the chillier winter weather ahead. The government has done away with the off-peak and peak-hour electricity charges for industries but it remains uncertain whether this will continue after the International Monetary Fund (IMF) concludes its ongoing talks with the government on energy reforms.

Even the otherwise burgeoning intra–energy sector circular debt may eventually force the government to reprice energy products upwards. The Federal Board of Revenue (FBR) has hit the revised tax revenue target in the fifth month of this fiscal year. But the question remains whether it can continue to meet all monthly targets if the second wave of Covid-19 is not contained immediately or if ongoing political confrontation takes an uglier turn. Merchandise exports

have grown 7.2pc year-on-year only in November but July-November cumulative growth is just 2pc. Remittances are doing better than expected but partly due to the fact that overseas Pakistanis who lost jobs during the pandemic in their host countries are bringing back home their savings. The textile sector is growing but is not able to meet more than half of its cotton requirements domestically.

Merchandise exports have grown but July-November cumulative growth is just 2pc.

What happens if the cotton output this year also falls sharply as it did last year? The current account surplus should stay as long as imports remain low and high growth of remittances persists. But imports may eventually grow as the economic recovery gains momentum. Growth in remittances may eventually taper off in the next fiscal year due to the high-base effect and also because of the decline in the number of people going abroad for work. In the first 10 months of the current calendar year, only 183,630 Pakistanis went abroad on work visas against 625,203 in the last full calendar year, according to the Bureau of Immigration and Overseas Employment. Better showing of major crops i.e. rice, sugar cane and wheat cannot contribute much to the economic recovery if the commodity sector’s structural issues are not addressed. This seems a far cry under the current polarised political system.

Even if the political instability eases off in coming months, strengthening the economic recovery and accelerating its pace will surely be difficult amidst a low investment rate and a low domestic bank credit to GDP ratio. As in most parts of the world, the private sector is the main driver of economic growth in Pakistan but banks fail to meet its financing needs. That is why the domestic credit to GDP ratio here stood slightly above 18pc in 2019 against 50pc in India and 45pc in Bangladesh, according to World Bank statistics.

During the current extraordinary situation created by Covid-19, the central bank slashed the key interest rate by 625 basis points to 7pc and introduced several schemes to boost private-sector credit at affordable rates. But the private sector is currently busy retiring old, expensive loans with the fresh loans taken at low interest rates. That’s one of the reasons why the July-October net private-sector lending of banks is negative Rs49 billion.

Fixed investment in Pakistan was equal to 13.8pc of GDP — 10pc by the private sector and 3.8pc by the public sector. The SBP, in its 2019-20 annual economic report, has highlighted this fact and noted that “this shortage of investments has left Pakistan economy increasingly vulnerable to boom-bust cycles of economic growth, since most of the growth spurts have been financed primarily by foreign inflows rather than domestic savings”.

No wonder then that the PTI government is also relying more on foreign inflows rather than domestic savings for economic growth (or economic recovery). Making an economic recovery reliant on foreign inflows strong or accelerating its pace is obviously difficult.

Published in Dawn, The Business and Finance Weekly, December 7th, 2020