Effective decision-making can help the economy

The economic situation in Pakistan presents a complex and multifaceted challenge that requires careful management of external and internal factors to avoid significant economic destabilization. The decline of $152 million in the State Bank of Pakistan’s foreign exchange reserves is unsurprising considering the external borrowing obligations, debt payments, and profit repatriation commitments. However, the overall increase of $206.7 million in net foreign reserves suggests a marginal improvement, though it may not be sufficient to support a sustainable economic recovery. Pakistan’s reliance on external borrowing, especially in the context of a high debt-servicing requirement, remains a critical risk factor for the country’s financial stability. The inability to manage these payments effectively can worsen the overall fiscal situation. The challenge lies in balancing foreign exchange reserves with economic activity. Excessive spending can lead to a deterioration in the current account balance, especially if foreign reserves are insufficient to cover the increased expenditure. This can exacerbate inflationary pressures and worsen the fiscal deficit. Pakistani expatriates continue to play a key role by driving remittances to record levels, which is a crucial lifeline for the economy. However, the reliance on remittances as a primary source of foreign exchange inflow points to the need for more sustainable solutions like export growth. Increasing bank credit to the private sector, especially for agriculture and industry, is vital for stimulating economic activity. This could help spur investment, consumption, and overall economic growth. Pakistan’s tax-to-GDP ratio remains dangerously low. This indicates a critical gap in the government’s ability to fund its operations and investments, and improving this ratio is essential for long-term financial stability. The State Bank of Pakistan (SBP) must play a critical role in facilitating access to credit for businesses. Maintaining low interest rates and encouraging lending could stimulate economic growth, but this must be balanced with inflation control and fiscal responsibility. The Prime Minister’s “Uraan Pakistan” plan aims to double exports and achieve 6% economic growth by 2028, with a vision of transforming the economy into a trillion-dollar economy by 2035. This ambitious plan requires substantial investment, which the finance ministry and SBP must facilitate. The finance ministry’s strategy must align with the SBP’s monetary policies. The lack of financial support from the SBP could jeopardize the success of the program. Coordination between fiscal and monetary authorities is crucial for achieving the long-term goals outlined in the plan. Pakistan faces a liquidity shortage in both foreign exchange and local currency. The SBP’s decision to inject nearly Rs. 12 trillion through open market operations (OMOs) reflects an effort to address this issue, but it also highlights the underlying liquidity constraints that need to be addressed in a more sustainable manner. Changes in the Advance to Deposit Ratio (ADR) could be an indication that the banking sector’s activity reports may not fully reflect the actual economic activity on the ground. The SBP must carefully monitor these adjustments to ensure accurate reporting and effective policy response. If there are delays in the preparation of the budget and implementation of the Uraan Pakistan plan, it could result in a reduced timeframe to achieve the goals. With the plan only announced in late December 2024 and the budget cycle to be completed by June 2025, there is a risk of lost time in realizing the vision of doubling exports and achieving high growth targets. The ambitious goals set in the Uraan Pakistan plan require a unified and coordinated effort between fiscal and monetary authorities. Without addressing fundamental issues, the success of the plan remains uncertain. Time is of the essence, and effective decision-making in the coming months will determine whether Pakistan can steer its economy toward a more sustainable path.