Fragility not recognized

Business Recorder

15 hours ago

The history of Pakistan's economy can be aptly summarised in three words: fragility not recognised. That since 1947, except for very few years, Pakistan has lived off IMF programmes is a fact. We have had twenty-four programmes since 1950, roughly averaging one programme every three years.
The problem is not the fragility of the state of the economy. The problem, in fact, lies in weak and unrepresented governments, all the time, that never had the 'courage' and 'strength' to tell the truth about Pakistan's real economic situation to the people so that real corrective efforts could be undertaken.
This is happening again. Recently Fitch, a global rating agency, has improved the country's rating, which is a very commendable sign; however, it does not in any manner provide space for complacency.
Nevertheless, the amateurish people from government and non-government sources are of the view that all economic problems have been solved and Pakistan has adopted a correct trajectory for sustained growth. This mantra has been repeated so many times that now these words do not mean anything for a common Pakistani.
The author considers it is a national responsibility to state that proper facts be brought before the people and the government. In this regard the first step is to see what Fitch has said. It states as under:
'Key Rating Drivers
Fiscal Consolidation, External Stabilisation: The upgrade reflects Fitch's increased confidence that Pakistan will sustain its recent progress on narrowing budget deficits and implementing structural reforms, supporting its IMF programme performance and funding availability.
We also expect tight economic policy settings to continue to support recovery of international reserves and contain external funding needs, although implementation risks remain and financing needs are still large. Global trade tensions and market volatility could create external pressures, but risks are mitigated by lower oil prices and Pakistan's low dependence on exports and market financing.
Policy Credibility Gradually Rebuilt: Pakistan and the IMF reached a staff-level agreement in March on the first review of the country's USD7 billion Extended Fund Facility and a new USD1.3 billion Resilience and Sustainability Facility, both set to last until 3Q27.
Pakistan performed well on quantitative performance criteria, particularly on reserve accumulation and the primary surplus, although tax revenue growth fell short of its indicative target. Provincial governments have also legislated increases in agricultural income tax, a key structural benchmark. This follows Pakistan's strong performance on its previous, more temporary arrangement, which expired in April 2024.
Fiscal Performance Improving: We forecast the general government budget deficit to narrow to 6 percent of GDP in the fiscal year ending June 2025 (FY25) and around 5 percent in the medium term, from nearly 7 percent in FY24. Our FY25 forecast is conservative. We expect the primary surplus to more than double to over 2 percent of GDP in FY25.
Shortfalls in tax revenue, in part due to lower-than-expected inflation and imports, will be offset by lower spending and wider provincial surpluses. The lagged effects of high domestic interest rates in recent years still weigh on fiscal performance, but also drove the State Bank of Pakistan's (SBP) extraordinary dividend of 2 percent of GDP to the government in FY25.
Downward Debt Trajectory: Government debt/GDP dropped to 67 percent in FY24, from 75 percent in FY23, and we forecast a gradual decline over the medium term, reflecting tight fiscal policy, nominal growth and a repricing of domestic debt at lower rates.
Nevertheless, the debt ratio will still tick up in FY25 due to a rapid decline in inflation and will remain above the forecast 'B' median of just over 50 percent. The interest payment/revenue ratio, which we forecast at 59 percent in FY25, will narrow, but remain well above the 'B' median of about 13 percent, given a high share of domestic debt and a narrow revenue base.
Lower Inflation, Economic Stability: We expect CPI inflation to average 5% yoy in FY25, from over 20 percent in FY23-FY24, on fading base effects from several rounds of energy price reforms, before picking up again to 8 percent in FY26, in line with urban core inflation over the past few months. The SBP held its policy rate steady at 12 percent in March, noting pressures on the current account (CA) and persistent core inflation, after 1,000bp of rate cuts between May 2024 and January 2025. We expect GDP growth to edge up to 3 percent in FY25.
External Deficit Contained: Pakistan posted a CA surplus of USD700 million in 8MFY25 on surging remittances and favourable import prices. Imports picked up in early 2025 and we expect external deficits to widen from our forecast of a broadly balanced position for FY25 on stronger domestic demand. Nevertheless, they should remain below 1 percent of GDP in the coming years. We think some informal FX demand management persists after the loosening exchange rate and import controls, and market reforms in 2023.
Risks from Global Volatility: International trade tensions could hurt Pakistan's goods exports, with exports to the US, mostly textiles, accounting for 3 percent of GDP (35 percent of the total) in FY24. Lower commodity import prices could soften the blow on the trade balance. Remittances, Pakistan's main source of external receipts, mostly come from the Middle East and tend to be resilient to the economic cycle. Pakistan has become less reliant on market and commercial financing in recent years, but market turmoil could still reduce access to loan funding.
Reserve Recovery: We expect a further buildup of gross reserves after the SBP's purchase of FX in the interbank market brought them to just under USD18 billion in March 2025 (about three months of external payments), from about USD15 billion at FYE24 and a low of less than USD8 billion in early 2023.
Measures of net FX reserves are much lower, reflecting FX reserve deposits of domestic commercial banks, a Chinese central bank swap line and bilateral deposits at the SBP. Nevertheless, we still view gross reserves as the most relevant indicator of Pakistan's external liquidity.
Funding Needs Still Large: The government will face about USD9 billion in external debt maturities in FY26 after over USD8 billion in FY25 (nearly USD5 billion in 2HFY25). Both figures exclude USD13 billion in bilateral deposits and loans that are regularly rolled over, of which USD4 billion is at the SBP.
The next international bond maturity is in September 2025. Besides bilateral rollovers, the authorities secured USD4 billion in external financing in 1HFY25 from a mix of multilateral and commercial sources and are expecting to obtain USD10 billion in 2HFY25, of which USD4 billion would be from multilaterals and USD5 billion from various commercial loans, mainly refinancing from Chinese banks.
Challenging Politics, Security: Prime Minister Shehbaz Sharif's PMLN party and its allies received a mandate that was weaker than we expected in elections in early 2024, although they still have a constitutional majority in the National Assembly and are backed by the country's influential military. Former prime minister Imran Khan, imprisoned since May 2023, remains highly popular. Domestic political and economic fractures are compounded by the increased frequency of security incidents along the border with Afghanistan and in the Balochistan province.
Implementation Risks: Governments from across the political spectrum in Pakistan have had a mixed record of IMF programme performance, often failing to implement or reversing the required reforms. The current apparent consensus within Pakistan on the need for reform could weaken over time. Technical challenges will also be significant.
Fitch is a credit rating agency. What it has demonstrated is that things have improved for Pakistan for availing more credit or rollovers of credit and IMF's money, which amounts to now around USD 10 billion is safe. They are right in their approach. It is their duty to do so; however, the primary question which a common man has to ask is whether these indicators, which are all borrowed derivatives from almost a failed idea of 'Washington Consensus', could provide any relief from economic pressure for ordinary Pakistanis.
The undertone of these indicators suggests that the economy is going to shrink, leading to unemployment and decrease in real wages. If there is a dissection of all the key drivers as referred above, it means that this state of affair has emerged on account of two factors (a) reduction in the discount rate from 22 to 12; (b) highly conservative use of foreign exchange and rollovers of cheaper debt against costlier debt from the market. For the creditors this appears to be fine which is also the objective of Fitch; however, the author does not find any reason to be complacent or satisfied. In the author's view the increase of discount rate to 22 percent was exceptionally incorrect.
Unfortunately, it has been the tragedy of Pakistan's economics that money lenders decide about the fate of 250 million who have gallantly fought a country, which is seven times of her size. These money lenders, and their agents, the credit rating people are right insofar as their arguments or stances are concerned; however, it is our duty to also see the other side of the picture.
The question for us is whether or not with this kind of economic order Pakistan would be able to feed her 250 million people and take 20 million uneducated children to schools. In the author's view the answer is in the negative. The whole government budget (around 90+) is spent on consumption expenditure leaving no place for infrastructure development. The main rail track is almost the same as it was 'bequeathed' to us by British colonizers in 1947.
Furthermore, the private sector has been so heavily taxed that there is no amount left for saving and investment. The effective saving rate in Pakistan is 'zero' for the reason that such savings are used by the banks and national saving institutions to meet current expenditure of the government.
The money lenders are giving positive signs for the reason that they have big stakes in the country. However, it would be 'our' mistake and complacency to think that they have taken into account the fate of the borrower who has effectively not 'invested' in the economy for at least two decades.
No country can achieve sustainable growth unless there is an investment in the economy. It is our duty to look for out-of-the-box solutions to overcome the perennial issue of 'consumption over investment' in Pakistan. The first step is to forge national economic and political consensus for at least two decades.
Copyright Business Recorder, 2025