Pakistan has made appreciable gains in the external sector, particularly in goods exports and remittances during the first quarter of FY25 (July-September 2024). That has helped create a modest current account surplus and kept the rupee relatively stable.

However, whether these gains can be sustained in the next three quarters of this year and in the coming years cannot be predicted. Much depends on whether and at what cost political stability is restored and on how fast and at what cost further cooperation from China, Saudi Arabia and the United Arab Emirates is earned.

Finance Minister Muhammad Aurangzeb said in Washington last week that he hoped to get additional foreign exchange from the International Monetary Fund (IMF) out of its climate resiliency fund within this fiscal year.

The IMF has already approved a $7 billion loan for Pakistan and has disbursed its first tranche of $1.1bn. If this loan is topped with the climate resilience funding, Pakistan may hope to get $8.5bn to $9bn in total in a span of three years.

Internal political issues paired with external global conflicts may put Pakistan’s economy in dire straits unless it focuses on foreign investment

Meanwhile, the country, with its massive external debt obligations of about $90bn in three years, continues seeking crucial support from China, Saudi Arabia and the UAE.

Pakistan’s hybrid government claims it has convinced China to roll over $16bn of the total $26bn loan that the country owes, though official confirmation from the Chinese side is still awaited. Saudi Arabia and the UAE have also rolled over their state funds placed with the State Bank of Pakistan (SBP), with Saudi Arabia additionally extending its oil-on-deferred-payment facility, providing ease in external debt and import payments for $5bn to $6bn. These measures are important and have been achieved after great efforts.

But we must not forget that despite such arrangements at least $14bn to $15bn are needed to make external debt payments in three quarters of this fiscal year — between October 2024 and June 2025. That is why the sustainability of the recent gains in exports and remittances is critical, and a surge in foreign direct and portfolio investment is vital.

US elections and frequent Middle Eastern conflict flare-ups could impact Pakistan’s exports, import costs, and home remittance inflows

Naturally, emphasis should be placed on ensuring that the promises of foreign direct investment in Arab countries and Shanghai Cooperation Organisation (SCO) nations materialise rapidly and that our corporate sector performs better in attracting foreign portfolio investments in equities.

But to make that happen, achieving political stability at home and ensuring the right balancing of geopolitical policies and postures is a must.

Another important thing to keep in mind is how the outcome of the ongoing US elections, the ongoing conflict between Israel and Lebanon, and possible escalation in military conflict between Israel and Iran may impact Pakistan’s goods and services exports, free selection, and cost of import of goods, as well as foreign direct and portfolio investment.

Further flare-ups in military clashes in the Middle East may also greatly affect the volumes and pace of inflows of home remittances, which is currently our number one source of non-debt, forex-creating inflows.

Mitigating the undesirable effects of these events on Pakistan’s external economy will surely become easier if sanity prevails in Pakistan’s internal politics and if the country makes crucial moves in geopolitics with a broader national consensus.

That said, the growth momentum in goods’ exports can also not be sustained if the energy crisis persists and the cost of gas and electricity for industries and businesses remains as high as they are.

The IMF has projected 3.2pc growth for Pakistan’s economy during this fiscal year, and SBP says the growth rate may settle somewhere between 2.5pc and 3.5pc. These projected rates clearly indicate that the economy will continue to struggle on two fronts: job creation and alleviation of poverty through development spending (and not through cash handouts).

Will this not create further frustration among people and small businesses whose contribution to the national exchequer (through indirect taxes) remains disproportionately higher than the country’s ruling class and elite groups? And will it not make the achievement of the much-needed national unity and political harmony at all levels and across Pakistan even more difficult? Your guess is as good as mine.

Mr Aurangzeb said last week in Washington on the sidelines of the IMF-World Bank meeting that broadening the tax base, reforming the energy sector and privatising state-owned enterprises are his three key priorities.

For further broadening of the tax base, he will have to introduce more direct taxes than indirect taxes if his government does not want to risk enraging the already frustrated public that is now paying very high indirect taxes on milk tea, medicine and cell phone services. Can he do this if political polarisation persists?

Published in Dawn, The Business and Finance Weekly, October 28th, 2024