Will Pakistan muddle through to achieve targeted economic growth this fiscal year while struggling to maintain the fragile stability that is slipping out of its grip?

The positives include the inherent resilience of the economy and pro-active stimulus-laden public policy that delivered last year’s surprising growth and helped bring about a shift in public policy focus from consolidating stability towards growth.

And no less important is the notable performance of large-scale manufacturing (LSM), marked by a more perceptible tilt in the role LSM is playing in recovery vs the capital market. The growth in inflows of funds into the Pakistan Stock Exchange (PSX) is apparently faltering.

Morgan Stanley Capital International (MSCI) has downgraded PSX from its emerging markets to the frontier market index. The Pakistani companies listed on the bourses included in the MSCI index would have a reduced weight of 1.9 per cent as MSCI says the PSX no longer meets the standards for its size and liquidity.

The PSX had a weight of 9pc in the frontier market index from 2008 to 2017, recalls Tahir Abbas, head of Aba Ali Habib Securities Research.

Trade opportunities for Pakistan with Afghanistan and the region may open faster than initial expectations

Contrary to the views held by market players that the downgrade will lead to more inflows of foreign portfolio investment, Syed Shabbar Zaidi says, “The MSCI’s decision is a wake-up call.”

Though the country’s manufacturing has still a long way to go, in sharp contrast, the LSM grew by 14.85pc in 2020-21 led by an expansion in food, textiles, automobiles and construction-allied sectors partly also due to higher textile export orders.

What is still critical in this area for policy action, as pointed out by an analyst with insight, is that without ‘productivity reforms’ neither enough dollars can be earned nor saved to reduce the widening foreign trade gap.

Fresh official efforts have however been mounted now to shore up the sagging spending on the federal public sector development programme.

From July to September 3, financial releases shot up to a record Rs392.69 billion in two months, accounting for 43pc of the annual budgeted Rs900bn Public Sector Development Programme for ongoing projects, according to the latest update of the Ministry of Planning, Development, and Special Initiatives.

This financial clearance in two months exceeds significantly the 20pc ceiling on the financial release during the first quarter of 2020-21. Under the latest procedure, disbursements of the total annual budgeted development funds would be equally distributed in two half-yearly instalments.

In view of the return of external pressures, the growth of risk is increasing but some mixed trends are keeping policymakers committed to a growth path.

First, the foreign trade numbers. The trade deficit for July-August widened by 120pc to $7.5bn from a year-ago period, with imports recorded at $12.1bn and exports at $7bn.

An important balancing factor is the surge in remittances by overseas Pakistanis which simultaneously increased by 10.4pc to $4.86bn. This is the sixth consecutive month when remittance inflows were recorded around an average of $2.7bn and 15th consecutive months they have been above $2bn, according to the central bank data.

But in a reversal of fortune, on September 14, the dollar hit an all-time high at Rs168.94 reportedly shattering the investors’ confidence in local currency and exchange rates stability while raising risks to growth.

Finance Minister Shaukat Tarin says ‘speculators’ created artificial demand while admitting that there is pressure on the exchange rate because of the balance of payments, adding that the import bill was constantly being reviewed. In his view, the approximate real exchange rate should be in the range of Rs166-167.

While remaining in the ambit of conventional wisdom, the PTI government has adopted a flexible policy to address simultaneously issues in weak growth and fragile stability.

The space has been provided by ‘pause’ and ‘recess’ in the International Monetary Fund programme and substantial liquidity injected twice by the Fund to shore up Pakistan’s dollar reserves and service the surging foreign debts following the outbreak of the pandemic.

An unconfirmed media report says Pakistan and China have agreed to hold talks to roll over $3bn China-Pakistan Economic Corridor debt. And the International Islamic Trade Finance Corporation (ITFC) — subsidiary of the Islamic Development Bank — would provide $600 million commodity financing this month.

The payment would be a part of the $4.5bn new agreement signed by two sides in June this year to finance oil, liquefied natural gas and fertiliser imports over the next three years (2021-2023).

No doubt foreign debts will surge and so will be rupee debt servicing costs, the solution however lies in production-led growth to both earn and save dollars.

The increase in foreign debts in absolute terms is unlikely to push up the foreign debt-to-GDP ratio if recovery is consolidated as demonstrated from last year’s surprising growth rate.

A favourable development, as some analysts note, is that the country’s security situation on its eastern borders has eased in sharp contrast to earlier alarming concerns of a possible fallout of a misperceived threat of a looming civil war in Afghanistan.

The good news for Afghanistan and the region is that at the United Nations conference held in Geneva on September 13, donors pledged $1.1bn to meet Kabul’s ‘pressing needs.’

US State Department spokesman Ned Price recently said “the US was reviewing its bilateral assistance to the government of Afghanistan.”

Washington has been advised by Qatar and Pakistan to unfreeze Kabul’s financial assets, arguing that the people of Afghanistan deserve to be helped despite what is happening in the political landscape.

Afghans are enterprising people whose creativity has been enriched by experiences of prolonged wars, similar to what was witnessed in Vietnam. In the midst of a raging war, Afghans distinguished themselves in expanding informal cross-border and regional trade that ensured the delivery of goods at the buyers’ doorsteps in the neighbouring countries.

The first spurt in economic activities is likely to come from the revival of formal domestic, transit and regional trade while Afghanistan is limping back to sub-normal economic activities.

Trade opportunities for Pakistan with Afghanistan and the region may open faster than initial expectations and may turn out to be a positive factor sooner rather than later in our long-run struggle for sustained economic growth with stability.

Published in Dawn, The Business and Finance Weekly, September 20th, 2021