Delicate balance

EDITORIAL: It seems there’s plenty to celebrate on the economic front. FDI (Foreign Direct Investment) jumped a good 48pc in the first quarter of the ongoing fiscal year, clocking in at $771 million against $520 million during Jul-Sep 2023. Total foreign investment, which includes FDI, portfolio investment and foreign public investment, saw a substantial growth of 70pc, reaching $903.5m in Jul-Sep 25, up from $530m in the same period last fiscal.

The external account continued to show positive momentum as well, recording a second consecutive current account surplus of $119m in September 2024 on the back of strong inflows of home remittances and higher exports. This is no doubt a “significant turnaround”, in the words of the SBP (State Bank of Pakistan), from the $218m deficit in September 2023.

This means the current account deficit for the first quarter of FY25 is reduced to $98m, an impressive 92pc decline from the $1.241bn deficit in the same period last year. Exports also surged 14.11pc to $7.87bn in Q1 while remittances grew 39pc to $8.8bn. Importantly, IT and IT enabled services (ITeS) export remittances comprising computer and call centre services registered 33.7pc growth in the same period - $876m against $ 655m in Q1 of FY24.

All this is very welcome news, no doubt, yet while the politicians celebrate the finance and commerce ministries, as well as the central bank, would be mindful that the successful start to the IMF (International Monetary Fund) programme, the (finally) stable exchange rate, reduced inflation and dropping interest rates will combine to trigger an inevitable increase in imports and put pressure on the current account once again.

So the external account is in a very delicate balance, and since it’s not rational to expect remittances to keep rising fast enough to offset the import bill and expanding current account deficit, the government will have to extend all manner of facilitation possible to the export sector, especially IT and ITeS exports.

It’s important to remember that the first quarter’s gains, impressive as they are, came at the cost of reduced imports, cuts in public expenditure and a pronounced drop in economic activity that spiked the unemployment rate, among other things. And unless this period of relative economic calm is leveraged to implement structural reforms that will improve industrial production and provide ease of doing business to foreign investors, they will peter out much faster than they accumulated.

The robust growth in IT and ITeS export remittances needs to be protected and nurtured. The agriculture sector has already taken a bad hit and cannot be counted on to contribute to earnings in any meaningful way this fiscal, so opportunities must be exploited as and when they present themselves. And the IT sector has emerged as a viable vehicle to expand exports and bolster foreign exchange reserves.

The economy seems on the mend, no doubt – inflation is manageable again, interest rate cycle has turned, IMF programme is underway – but it is, by no means, out of the woods just yet. Financial authorities have succeeded in stabilising the situation, but the platform for sustained growth is not yet ready. Going forward, with imports increasing and IMF’s taxes inflating utility bills and bringing cost-push inflation back into the picture, the same problems will present themselves all over again.

Therefore, rather than bask in the glory of small, temporary gains, the government should be transparent with the people and start preparing for the tests that are bound to come; that too sooner rather than later. Hopefully, the lessons of the past, when similar gains have been allowed to go waste, will be heeded this time.

Copyright Business Recorder, 2024