Pakistan's economic carnage over in 2019, say analysts

In this file photo, a Pakistani customer checks pulses at the main wholesale market in Karachi on April 27, 2018. Analysts say Pakistan’s economic carnage will be over in 2019. (AFP)

• Depleting foreign exchange reserves, swelling trade deficit, increasing interest rate, and spiraling inflation add to the pressure
• Several experts remain hopeful and tell Arab News that the worst may be behind us

KARACHI: Shortly before the end of 2017, Pakistan’s government had devalued the national currency. The trend continued in the following year with the rupee depreciating by 32 percent in 2018, having a detrimental effect on the country’s overall economy.
The currency which traded at about Rs84 against the US Dollar in 2010 surged against the greenback from Rs97 to Rs105 between 2013 and 2017, with the government deciding to devalue the currency to Rs110 on December 8, 2017. Ever since then, the rupee has witnessed five rounds of devaluation against the US Dollar in 2018, leaving it at a perilous level of Rs139.
The pressure on the rupee continued to build up after the country’s foreign exchange reserves started to weaken from $24.6 billion — including $19.4 billion held by the State Bank of Pakistan (SBP) in October 2016 — to $14 billion. This also included $7.4 billion held by the SBP until December 21, 2018, mainly due to increasing imports and decreasing exports.
The rupee’s devaluation took place against the backdrop of declining forex reserves, exerting pressure on the country’s capital market, external trade, and interest rate. Financial gurus termed 2016 and 2017 as tough years for the country’s economy — a trend which continued in 2018 after the country witnessed a political transition with the end of the five-year tenure of the Pakistan Muslim League-Nawaz (PML-N) government and the emergence of the Pakistan Tehreek-e-Insaf (PTI) administration.
“Backed by high oil prices, the trade deficit of the country continued to swell. During the last two years, Pakistan has had to suffer from record high fiscal deficit. These factors increased pressure on the country’s foreign exchange reserves and, ultimately, on the rupee which could not sustain pressure,” Aqeel Karim Dhedhi, Chairman of AKD Group, one of Pakistan’s biggest business conglomerates, told Arab News on Tuesday.
The impact of the country’s tough fiscal position also affected the bourse, which turned from the best performing market in 2016 to the worst equity market witnessing a fall of 8.41 percent in 2018. “The equity market continued to fall for the second consecutive year. This fall in two successive years came after a period of 22 years. Pakistan lost $26 billion of market capitalization in 2018,” Muhammad Sohail, CEO of Topline Securities, said.
The biggest rally of the year was seen when Saudi Arabia promised to provide a $6 billion financial package in October 2018 after Prime Minister Imran Khan’s visit to the Kingdom. The market gained 12 percent – or 4,289 points – in the wake of that trip.
However, investors remained skeptical due to the key interest rate being more than two percent, in addition to more than 20 percent currency devaluation, high external and fiscal deficit, and an uncertain outcome of negotiations with the International Monetary Fund (IMF) to fill the external financing gap of $21-22 billion. A lack of clarity about the overall economic roadmap didn’t help with the cause either.
In the backdrop of the emerging economic situation, Pakistan’s central bank was also moved to hike it’s key interest rate by 4.25 percent to 10 percent on November 30, 2018 – at a six-year-high level – after dipping to a 40-year low at 5.75 percent in May 2016.
“The cumulative outcome of the rupee’s devaluation, interest rate hike, and inflation were seen in the markets where businessmen had to face harsh conditions in 2018,” Atiq Mir, Chairman of Karachi Tajir Ittehad, an umbrella of nearly a 100 trade associations, told Arab News.
The CPI inflation General increased by 6.5 percent on a year-on-year basis in November 2018. The lowest level of inflation witnessed was at 3.2 percent in March 2018, according to the Federal Bureau of Statistics.
However, experts believe that the measures taken by the government to discourage imports, smuggling and under-invoicing will yield a positive result in 2019. “These steps, including phasing out of the black economy, will have a positive impact on the local industry,” Dhedhi said, adding: “I don’t think rupee will be further devalued.”
“The measures to restrict imports and declining trend in the international oil market are likely to create a positive impact in 2019 and may also reduce current account deficit,” Muzzamil Aslam, a senior economist, said optimistically.
“I believe the worst is behind us and there are some silver linings that can give us hope and confidence about the future. The recent efforts made on the macro front have created room for managing external and fiscal challenges in the short run. Meanwhile, the policy strategists are crafting the long-term sustainable policy for growth and eventual prosperity,” Khurram Schehzad, a senior financial analyst and CEO of Alpha Beta Core, said.
“I am confident that 2019 will see Pakistan set course on a path of sustained prosperity & peace and lay the foundation of a society of equal opportunity for all its citizens,” Asad Umar, Pakistan’s finance minister, had tweeted on New Year’s Eve.
The optimism exhibited by experts and stakeholders was further bolstered by the astounding performance of the equity market on the first day of 2019. Pakistan’s stock market greeted the New Year with the benchmark KSE 100 index posting gains of 980 points.