Consumption and import led robust economic growth in FY17 and FY18 was driven by loose monetary policy and an overvalued currency regime, which exposed Pakistan to vulnerability on the external account.

With Current Account Deficit (CAD) ballooning to $19 billion for FY18, forex reserves have eroded to a dangerously low level exacerbated by large scheduled foreign loan payments.
The precarious situation prompted the government to pursue tightening policies such as Rupee devaluation, monetary policy tightening, and levying and expanding of import duties with the aim to contain domestic consumption.
These policy measures manifested itself with monthly CAD dropping to an average $1.2 billion/month in 4-months of FY2019, compared to an average $1.6 billion/month witnessed in FY2018.
“We expect further contraction in CAD going forward as the full impact of these policy actions kicks-in. The government is working on improving the remittances quantum, growth of which slowed down in the last few years. The government has also redoubled its focus on boosting exports as further incentives have been parceled out to them such as exemption from gas and electricity tariff hikes,” Dr. Amjad Waheed CEO NBP Funds noted.
On the downside, the above policy measures will result in slowdown in economic growth to 4.4 percent for FY2019, he said.
Substantial drop in crude oil prices in the recent weeks amid supply side adjustments is a major positive for Pakistan economy as it will lower the import bill in coming quarters, if the oil prices remain on the lower side.
As per estimates, the country saves $1.0 billion/annum on every $5/barrel decrease in oil prices.
Lower oil prices are not only positive from the external account perspective, but this will also help limit the impact on inflation and interest rate.
From the economic and market perspective, entry into the IMF program, expected in January 2019, will provide much-needed confidence to investors and businesses.
“Besides providing immediate financial relief, entry into the IMF program would ameliorate the credibility of Pakistan in the eyes of global financial community, paving the way for fetching flows from multilateral agencies such as the World Bank, Asian Development Bank, Islamic Development Bank, and also facilitate access to international capital markets,” Dr. Waheed said.
Entry into an IMF program coupled with financial assistance from friendly countries will provide much-needed breathing space.
“Further, after the necessary currency adjustment and start of the IMF oversight post entry into the financing program, we expect foreign flows to resume in the stock market,” CEO NBP Funds said.