External account, inflation and interest rates

The movement towards the restoration of overall macroeconomic stability has certainly gathered pace in the last three months with the country achieving the milestone of a surplus in the Current Account after persistent deficits in the preceding twenty months. On a cumulative basis, the CA deficit stands at US$7.45bn in 8MFY09 as compared to a deficit of US$8.64bn in the same period last year, down 13.7%YoY. With international donor agencies fully supporting Pakistan’s nascent economic recovery, we think the external account will remain in a manageable state over the next four to six month period despite mounting pressures arising from the global financial crisis. This would of course depend on the GoP’s ability to maintain fiscal order and keep the budget deficit in the range of 4%-5% of the GDP. Empirically it has been seen that countries which have current & fiscal accounts in surpluses have experienced low erosion in economic growth during periods of slowdown in external capital inflows – a phenomenon which is in process these days. Maintenance of economic stability is a necessity if growth is to recover in the coming year, where we expect real GDP growth to recover to 4-4.5% in FY10.