Despite higher energy and interest rate costs and even amidst stagnant industrial output, Pakistan’s merchandise exports are growing — thanks to strong overseas demand, reduced bureaucratic impediments to export growth and a shift in export earnings from textiles to agricultural products and food.

On the other hand, merchandise imports continue to fall despite the recent decline in the US dollar value against the rupee — thanks to effective bureaucratic and banking controls on foreign purchases and a visible fall in domestic demand as the economy refuses to grow fast enough to bolster demand.

The merchandise trade deficit is falling, contracting the current account balance deficit and easing pressure on dollar demand. It is a small wonder, then, that the rupee keeps making modest gains in value day after day.

But will this trend, witnessed in the first half of FY24 (July-Dec 2023 but more so in Oct-Dec), continue through the second half of the year (Jan-Dec 2024)? That’s a million-dollar question.

A modest rate cut just to signal to the markets that the days of a tight monetary policy are gone won’t help revive industrial production

The International Monetary Fund (IMF) has insisted that Pakistan lifts all formal and informal controls on imports. The Funds demand will likely become louder after the expected 11th January approval of the second tranche of a $3bn loan.

After the general elections on February 8, the newly elected government will find it too challenging to continue import controls. It will be anxiously counting on the third and final tranche of the IMF loan, expected sometime in March-April, before seeking a larger long-term loan to address structural issues behind the balance of payment problems.

The caretaker government may have to swallow the first bitter pill (of freeing up imports) before the elections if the Fund’s demand becomes “urgent”. That depends on the IMF.

Volumetric growth in goods’ exports in July-Dec 2023 ($737m) is too little compared with the savings in import payments ($5.08bn) during the same period. This means the shrinkage in the merchandise trade deficit ($11.148bn in July-Dec 2023 from $16.965bn in July-Dec 2022) is qualitatively poor and undoubtedly unsustainable even in the short run.

Containing the trade deficit further more sustainably means the elected government will have to achieve a much faster rate of growth after easing import controls. Will it be possible amidst vanishing space for adequately subsidising energy or interest rates for exporters? Your guess is as good as mine.

Energy prices are not only set to remain at their current highs in coming months, but further upward revisions look inevitable as IMF-World Bank dictated energy reforms continue and the energy sector’s circular debt stocks remain still too large (Rs2.6trillion at the end of December 2023).

The great game of geopolitics requires the country to develop a cohesive national policy not only on the economy but also on national security

The days of reckless interest rate subsidies are already over, and the practice cannot be resumed, as the IMF doesn’t want it to happen. Some hope for the the general easing of interest rates from March onwards.

However, headline inflation in December was at 29.7pc. Given the possibility of the inflation rate remaining close to or even above 25pc in January and February, there is not enough space for the central bank to consider a substantial cut in its current policy rate of 22pc. And a modest rate cut just to signal to the markets that the days of a tight monetary policy are gone won’t help revive industrial production and commercial practices.

Pre-election political nervousness, worsening law and order situation in Balochistan and Khyber Pakhtunkhwa, the Federal Board of Revenue’s plan to tax retail businesses at all costs and no respite seen in the operational costs of industrial and commercial activity amidst elevated levels of inflation are already having a disastrous impact on small domestic businesses.

The corporate sector’s confidence has risen recently, though — thanks to some policy interventions of the Special Investment Facilitation Council (SIFC), the civil-army-run investment facilitation council, and timely external debt servicing despite forex shortages and a surge in gross tax revenue collection. In July-Dec 2023, the FBR collected Rs4.467 trillion in tax revenue, surpassing the target of Rs4.425tr.

However, two things are worth watching in the coming months: (1) Pakistan’s ability to line up foreign funds from friendly countries to fill in external financing gaps as well as its ability to attract foreign investment through SIFC and (2) growth in tax revenue after the February 8 general elections.

The army’s role in SIFC and through it in almost all key economic decision-making, plus the role it has acquired for steering the promised Green Revolution, may help revive the economy in the short run, that is, if the newly elected civilian government remains committed to the SIFC model of power sharing.

But will an elected government work with the same zeal under a new emerging order of SIFC-brand of political economy as the caretakers are working? Well, that depends on who comes into power, with whose blessings, and equipped with what kind of political vision.

The great game of geopolitics with such cruel manifestations like the spreading Israel-Hamas war, the recent deadly terrorist bombings in Iran, and the fragility of Pakistan’s external sector economy require the country to develop a cohesive national policy not only on the economy but also in other areas of collective life — national security included.

The unending tug-of-war between the political class and the establishment at this stage is obviously undesirable. Both sides must realise this. That said, the establishment must cease from the temptation of ushering in a political party of its choice.

It must be ready to work with whoever comes to power to develop a long-term economic roadmap under the unquestionable supervision of the people’s parliament and the country’s Constitution.

Published in Dawn, The Business and Finance Weekly, January 8th, 2024