Number theory: Why Pakistan's current account surplus may be bad for the economy | Latest News India - Hindustan Times

Number theory: Why Pakistan's current account surplus may spell bad news for the economy

May 30, 2023 02:50 PM IST

While Pakistan has managed to put a lid on its external problems, its domestic economic crisis is far from over.

Pakistan recorded a surplus in its current account for the second consecutive month in April, as per the data released by the State Bank of Pakistan on May 17, shrinking the ongoing fiscal year’s current account deficit by a massive 76% to $3.3 billion in July-April compared to the same period last year. This decline was the outcome of a sharp fall in imports by $13.5 billion -- a direct result of the import ban on luxury products and non-essential raw materials imposed in 2022. While the country has managed to put a lid on its external problems, its domestic economic crisis is far from over -- and even the current account surplus may actually be bad news.

A labourer pulls a cart loaded with supplies to deliver to a nearby market in Karachi, Pakistan May 24, 2023. REUTERS/Akhtar Soomro PREMIUM
A labourer pulls a cart loaded with supplies to deliver to a nearby market in Karachi, Pakistan May 24, 2023. REUTERS/Akhtar Soomro

Pakistan economy to grow by only 0.5% in 2023

The April update of the International Monetary Fund’s World Economic Outlook expects a significant deterioration of Pakistan’s economic fundamentals in comparison to the previous October 2022 update. Pakistan’s 2023 GDP growth was revised down by three percentage points to 0.5%, against 6% expansion in 2022. The unemployment rate is also estimated to rise to 7% in 2023, from the previous estimate of 6.4%. The devastating impacts of floods and ongoing domestic political uncertainty were the stated reasons for the downgrade. IMF expects Pakistan to grow by 3.5% in 2024, with unemployment rate to stay elevated at 6.8%.

Read: Pakistan’s perfect storm: An economic crisis meets a political one

See Chart 1: Revisions in IMF projections for Pakistan

Per capita incomes are expected to fall in 2023

Per capita incomes, which is a better measure of living standards than the GDP growth rate, paint a sobering picture on the Pakistan’s economic prospects. IMF data on real per capita GDP shows a drop in income levels by 1.5% in 2023, from 2022. However, the 2023 downturn appears to be milder than in the earlier two contractions – because of COVID-induced slowdown in 2020 (2.9%) and the Global Financial Crisis of 2008 (1.7%). This number is expected to attain 2022 levels (1.7 lakh Pakistani Rupees) in 2024.

See Chart 2: Trend in Pakistan’s GDP per capita

Inflation remains persistently high

Amid rising inflationary pressures, the State Bank of Pakistan raised its benchmark interest rate to 21% in April, the highest in 25 years, thereby taking the cumulative rate hike to 11.25 percentage points since January 2022. Data from the State Bank of Pakistan shows that the retail inflation, as measured by the Consumer Price Index (CPI), has been increasing at a faster pace in the aftermath of the Russian Invasion of Ukraine. The year-on-year growth in the index was 12.2% in February 2022, and it doubled to reach 24.5% in December 2022. Within the span of the following four months, it soared to reach 36.4% in April , the highest since 1974. Inflation has been in double digits for the past 18 months. The most damaging impact was in food prices, which rose by 48.1% in April , from a 17% growth in April 2022. The Pakistani Rupee has depreciated by 57.7% since February 2022. The US dollar-Pakistani Rupee Exchange rate was Rs.287 per dollar in April, up from Rs.175 in February.

Read: Pakistan’s inflation Asia’s fastest, outpaces Sri Lanka

See Chart 3: Monthly inflation in Pakistan

Large Scale manufacturing took the biggest hit

The immediate impact of the import ban on raw materials was in the manufacturing sector, which accounted for 19% of the GDP in 2022. The April Monthly Report from Pakistan’s Ministry of Finance shows that the Large-Scale Manufacturing (LSM) sector contracted 5.56% during July2022-Feb 2023 period against a 7.8% expansion in the same period a year ago. (

In response to the policies implemented by the current Pakistani government, Princeton Economist Atif Mian argued that lower GDP “will make it more difficult to pay off the debt — leading to more devaluation -- more misery -- and higher petrol prices in terms of purchasing power”, in a Twitter thread on May 24 ( Addressing a balance of payments crisis required that “a country acts decisively, restructures aggressively, and takes courageous decisions that demonstrate a clear break from the past”, he added.

See Chart 4: Pakistan’s performance of LSM

Trade problem

Even following several devaluations and commodity price shocks, Pakistan’s merchandise exports have been broadly flat for the last eight years. An August 2020 study by the World Bank found that because of supply and financing constraints, Pakistan’s exports do not strengthen as expected to exchange rate depreciation, but that exports are hurt when the rupee appreciates nominally ( To be sure, Pakistan’s terms of trade, especially for exports, worsen after a devaluation. This is why Rahul Bajoria, Head of EM Asia (ex-China) Economics, Barclays Research argues that “after the PKR depreciates, the key driver of improvement in the trade balance will have to be an outsized drop in imports, which is naturally induced by weak economic growth, thus creating a vicious cycle for debt sustainability.”

Read: Pakistan crisis is a case of deja vu than real change

See Chart 5: Pakistan’s exports & imports

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