ISLAMABAD: The government’s policy of keeping the exchange rate stable by intervening in the foreign exchange market may become unsustainable if the US dollar appreciates against most major currencies in global markets, warns a new United Nations report.

The stable exchange rate may be encouraging for some investors and traders, but the report warns that it is draining precious foreign exchange reserves.

“In these circumstances, if the US dollar appreciates against most major currencies in the global markets, the policy approach currently being pursued by Pakistan could become unsustainable,” it warns, raising the spectre of a forced devaluation at some point down the road.

The report is the ‘year-end update’ of the flagship Economic and Social Survey for Asia and the Pacific 2017 released by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).

The report acknowledges growth in investments in Pakistan amidst improving business sentiment and a climate characterised by low interest rates and increased infrastructure spending, with the bulk of private sector credit being extended to fixed investments.

It cautions that the current strength of Asian currencies is unlikely to last long, as advanced economies are normalising their monetary policies by gradually increasing interest rates from historically low levels, and folding up their quantitative easing measures.

It discounts the possibility of disruptive capital movements following the end of the era of easy money, arguing that tightening of the monetary environment has been widely anticipated.

Nevertheless, it is important to monitor such developments closely, it warns, “especially in economies that have vulnerable external positions, as those factors could lead to a strengthening of the United States dollar in global markets.”

The report forecasts a growth rate of 5.3pc for Pakistan in 2017 and 5.6pc in 2018. It notes the widening of the country’s current account deficit, which touched $12.1bn in FY17 which is about 4pc of GDP, “due to lower volumes of commodity exports, increased imports of capital goods related to both the China-Pakistan Economic Corridor (CPEC) and non-CPEC infrastructure projects.”

The report estimates that the rate of inflation in Pakistan is expected to rise from 4.2pc in FY17 to 5.5pc in FY18. The average headline inflation in the developing countries of Asia and the Pacific, 3.5pc in 2016, is moderate and expected to decline further to 3.2pc in 2017.

Selected indicators of fiscal space for Pakistan shows that the general government debt as percentage of GDP was 66.9 per cent; percentage of tax revenues was 631.4; public external debt as percentage of GDP was 22; concessional external debt as percentage of government debt was 19.7; and external debt as percentage of exports plus remittances was 15.7. According to the report, critical dimensions of the quality of work are its stability and security. Of countries with available data, nearly one in four wage employees were employed casually. Pakistan exhibited the highest rate of casual work, at 33.3pc in 2015, which had increased from 29.4pc in 2010.

For the region as a whole, given the low and stable rate of inflation, monetary policy is expected to maintain its accommodative stance and provide support for economic growth. However, central banks need to pay close attention to financial and external sector stability issues as well and continue with their deleveraging efforts to tackle the build-up of systemic risks.

Published in Dawn, December 8th, 2017