Is the government’s pro-cyclical growth strategy starting to unravel even before it could properly take off? That may not be so but the sharp surge in trade deficit in August bringing pressure on the balance of payments position is already sending jitters in the markets.

Many pro-growth economic analysts are expressing their concerns over the potential reemergence of imbalances in the country’s macroeconomic framework in the months to come, and questioning the wisdom behind maintaining low-interest rates and encouraging luxury imports, such as cars for the wealthy, to grow the economy.

“If anything, it is now the PTI’s turn to prove that it can forge and sustain growth with negative interest rates, increasing trade deficits and without actually tackling the longstanding structural issues facing the economy,” a Karachi-based financial analyst, who requested anonymity because of his investment firm’s policy, argues.

Does the government have a plan to sustain the economy and finance its rising imports to meet domestic demand beyond the short term?

A Bloomberg report last week described the Pakistani rupee as Asia’s worst-performing currency as it hit its 13-month low of 166.98 to a dollar in the interbank market last week with the August trade deficit widening to an all-time high of $4.05 billion.

Fahad Rauf, head of research at Ismail Iqbal Securities, anticipates the current account deficit for August to now surge to the June current account deficit (CAD) of $1.6bn or twice the July number of $773 million owing to 133 per cent year-on-year and 24pc month-on-month growth in the trade deficit. Others believe that the CAD could hit the roof, breaching the central bank’s projections of 2-3pc of GDP for the entire fiscal year, should the trade balance deteriorate further on import buildup to support the ongoing consumption-based economic recovery.

It is not surprising that the situation has also forced many pro-government analysts to suggest actions, ranging from the immediate State Bank of Pakistan (SBP) intervention in the currency market to stop further depreciation in the value of the home currency, imposition of export emergency (whatever it means), curbs on luxury imports, an adjustment in interest rate, increase in petroleum prices, etc. That practically means a significant rollback of what the PTI government has sold to people as its pro-growth policies.

On his part, trade advisor Abul Razzak Dawood has defended the increase in the trade deficit, contending that the imports of machinery and raw materials indicated ongoing investment by businesses in capacity expansion and new projects in the textiles, leather, chemicals and other sectors of the economy.

“This will be a game-changer and boost exports,” he was quoted to have commented. The advisor has also claimed that the PTI government had a backup plan to sustain the pressure brought about by the increasing import bill on the balance of payments position but didn’t elaborate.

With SBP reserves crossing $20bn or equal to three and a half months imports, and steady remittances flow, the government still can maintain external sector stability and finance the growing CAD in the short term. But does the government have a plan to sustain growth and finance its rising imports to meet domestic demand beyond the short-term?

With the government pushing growth through a generous fiscal and monetary stimulus, a lot depends on how the upcoming review of the $6bn International Monetary Fund programme (IMF), which has been in limbo for the last six months, turns out. Additionally, the Taliban’s takeover in Afghanistan has also created new uncertainty in the market with a significantly large amount of dollars flowing out to the neighbouring country, putting pressure on the exchange rate.

Businesses are worried both about the possible reversal of the pro-cyclical fiscal and monetary policies, as well as changes in Islamabad’s relationship with the IMF and possible insecurity spillover from Afghanistan.

“It is kind of a paradoxical situation; even a small change in the current business conditions may trip the nascent recovery,” commented a textile producer from Lahore. “The government has a very tight rope to walk on.”

According to analysts, the changing macroeconomic fundamentals require the government to step back for a minute and reflect on options it has to balance its short term growth target with the long term macroeconomic stability.

“This is a difficult situation and requires the government to start pushing through productivity reforms and boost exports for longer-term stability and growth in addition to discouraging the consumption of non-essential import-based luxuries for shorter-term recovery. That is not going to be an easy job though,” the anonymous analyst concluded.

Published in Dawn, The Business and Finance Weekly, September 6th, 2021