Pakistan economy suffers from the enormous current account deficit (CAD) increase, sending shockwaves across the nation.

Pakistan And India
raheel9630 / Pixabay

As China and India remain locked in what appears to be the most volatile situation on the Indian subcontinent in recent years, Pakistan enters the political crisis spurred by the ongoing investigation into the government’s corruption, leaving the country’s economy in tatters.

The Pakistan economy current account deficit (CAD) skyrockets in Fiscal Year 2017, as the shocking figure $12.1 billion – even the most gloomy forecasts had not estimated such a fiasco – is close to beating the decade highs. While exports continue nose-diving despite the economy-accelerating China-Pakistan Economic Corridor (CPEC) project, the Nawaz Sharif’s government has proven unable to contain the CAD from growing, as the Pakistan Stock Exchange crashed lately and the currency experienced its biggest single-day drop since the financial crisis in 2008.

The Pakistan economy is now headed to a new economic crisis, as the nation’s economy performance has been slowly spiraling to the disturbing figures of the nearly decade-old economic crisis. The Nawaz government, which has been shaken by the corruption charges lately, seems unable to plug the growing CAD hole, as the country hopes the outcome of the general election in 2018 would revive the economy.

Pakistan Economy In Pieces, As IMF Unlikely to Fund A Corrupt Government

Pakistan economy, which has been hailed by financial experts all over the world for its speedy accelerating performance last year and was even proclaimed the top-performing market in Asia, is on the brink of collapse, as the country’s current account deficit (CAD) is nearing decade highs.

A report by Credit Suisse shows gloomy results of the end of Fiscal Year 2017, as the Pakistan economy showed the CAD standing at $12.09 billion, a massive 149% increase since the end of FY2016. Even the most negative estimates from the Nawaz government’s critics had expected the CAD to be at around $8 billion by the end of FY2017, but the volatile political saga surrounding Nawaz’s corruption charges as well as the government’s lack of actions to revive the Pakistan economy continue damaging the country’s economy.

The somber report by Credit Suisse sent panic waves across south Asia’s second-largest economy, with many fearing that even foreign investments from China and the benefits of CPEC will not be enough to put Band-Aid on the bleeding economy. Many also doubt that the International Monetary Fund (IMF) would agree to save the Pakistan economy from crisis at least while the current government – plagued by the corruption charges – remains in office.

Pakistan’s CAD Nearing 2008 Financial Crisis Highs

While the balance between a country’s exports and imports remains the major determinant of the CAD, Pakistan exported goods worth $21.66 billion in FY2017, down from $21.97 billion in fiscal year last year. But it is the country’s falling exports that have taken a toll on the Pakistan economy.

In FY2017, Islamabad imported goods worth $48.54 billion compared to $41.25 billion last year. With the ever-growing current account deficit, Pakistan is nearing decade highs – $12.1 billion – that left the country’s nation in tatters during the 2008 financial crisis.

Weak exports and increased exports are not the only determinants that have contributed to the enormous increase in the CAD for the Pakistan economy. Heavy debt servicing and recovering oil prices only further aggravated the weakening economy, while the government’s incapability to manage its balance of payments has thrown Pakistan into the darkest hole of economic uncertainty.

‘CPEC Would Attract Huge Investments from Abroad’: Was It A Myth?

While it is unclear if the Nawaz government will have enough competence and resources to plug the hole of the growing deficit – with either money from the IMF or a loan from China – Pakistan’s foreign currency reserves keep plummeting. As a result, the nation’s rupee is on the brink of depreciation, while monetary policies are likely to be tightened within the next weeks or months.

Despite the seeming success of CPEC and its promised benefits for the Pakistan economy, Islamabad has been suffering from low levels of foreign direct investment (FDI) in recent years, data from Credit Suisse shows. While many Chinese and Pakistan economic experts predicted that CPEC would attract large inflows of investments from countries all over the world, Beijing still dominated the FDI.

In FY2017, the Pakistan’s FDI increased to only $2.41 billion from $2.30 billion in the previous year, largely thanks to the Chinese investment injections spurred by CPEC. More foreign investment from other key economic players – both Asian and international – are nowhere to be seen at this point.

The ongoing investigation into the Nawaz government’s corruption has further scared away investors from pouring their money into the Pakistan economy, as it would not be unprecedented for investors to stay away from nations run by corrupt politicians.

If Nawaz Is Removed From Power, Can Pakistan Economy Be Saved?

Despite the fact that the Pakistan economy showed surreal growth last year – in part spurred by the Chinese investment in CPEC – Pakistani people no longer consider it one of the major victories of the Nawaz government amid the corruption investigation that could unseat the Prime Minister before election 2018.

Pakistani people have seen the nose-diving economy in recent months on top of the corruption scandal, and it was enough for them to turn away from the ruling government.

Friday, July 21, may become the last day of Nawaz’s rule and the day of political change for south Asia’s second-largest economy. A Supreme Court hearing into the scandalous Panama Papers case could potentially remove Nawaz from power as investigators are looking into the allegedly forged documents by the PM.

In what could become one of the most dramatic political turns for Pakistan in its history, there is also a high chance that Nawaz could step down voluntarily amid the growing pressure against him. It is unlikely, however, that stepping down would allow his party to win the election next year, which means the Pakistan economy will have to rely on fresh faces to revive it and prevent a gruesome financial crisis.

After a recent Capital Economics study said the Pakistan economy was “likely to slow” in 2018-19, only quick and strict measures from a new government could save the nation from the economic crisis.