THE start is encouraging, as the government has posted some early successes to boast about.

Pressures on
the country`s external sector are subsiding and foreign exchange reserves, which soared to over $9 billion at
the end of the last month, have begun growing.

Encouraged by the implementation of fiscal and monetary reforms under the strict oversight of the
International Monetary Fund (IMF) since the start of the current financial year, its international partners are
unlocking their coffers for Pakistan.

The Asian Development Bank (ADB), for example, has approved a $1.3 billion budgetary support loan last
week, which included $1 billion in the crisis-response facility, to help the country build up its low foreign
exchange reserves.

This loan is part of $38 billion the government is expecting in foreign financing from its international partners
over the life of the 39-month, $6bn Extended Fund Facility deal signed with the IMF to ease its balance-of
payments troubles five months ago.

Global investors are also following suit and piling up to buy government debt. According to the State Bank of
Pakistan data, the country has so far attracted an unprecedented $1.18 billion in sovereign bonds since July.

This inflow in government debt securities is expected to spike to a record $3 billion by the end of the present
fiscal year. That is not all.

The current account turned into a surplus in October for the first time in four years, the trade gap has
narrowed by more than a third and tax revenues have jumped 17pc in the first five months (July to
November) of the present fiscal year.

In a nutshell, the government has so many wins to celebrate. But is the worst really behind us? Is it time to
declare victory? Not yet.

The entire stabilisation is based on shaky ground. The ADB says Pakistan is still facing significant economic
challenges on the back of a large balance of payments gap and critically low foreign exchange reserves
together with weak and unbalanced growth.

Moody`s Investors Service upgraded Pakistan`s economic outlook from negative tostable early last week but
reaffirmed the country`s credit assessment at B3, a junk rating.

The outlook was improved because of a narrowing current account deficit, currency flexibility and lower
external vulnerability risks.

Nevertheless, it cautioned that renewed deterioration in Pakistan`s external position, including through a
significant widening of the current account deficit and erosion of foreign exchange reserve buffers, which
would threaten the government`s external repayment capacity and heighten liquidity risks could bring
pressures on the rating.

`A continued rise in the government`s debt burden, without prospects for stabilisation over the medium
term, would also put downward pressure on the rating,` the Moody`s report said.
Why this warning? It is no secret that the trade deficit is narrowing not because we have significantly
increased our exports. It is primarily because of unprecedented import compression policies being pursued
for some time now as well as thanks to the low global oil prices. A surge in imports or an oil price shock can
upend the improvement in the current account.

A sustainable improvement in the current account deficit will be impossible without raising domestic
production and increasing exports. Although foreign investors are unlikely to exit the country`s debt market
any time soon, they cannot be relied upon for a very long time. Similarly, the progress made so far on the
fiscal side is largely owed to one-off nontax revenues.

Indeed, the tax collection has increased significantly in spite of an economic slowdown, it remains far below
the target. No one expects the Federal Board of Revenue to achieve the Rs5.5 trillion tax collection target for
this year.

Stabilisation of an economy weighed down by massive debt, low reserves, low productivity and weak growth
is not an easy job, and it is foolish to expect the government to turn the tide in one or two years. It is going to
be a long battle. Early signs of economic stabilisation are encouraging, but the government should not allow
these improvements to take its eyes off the ball while its ministers celebrate their early wins and raise false
hopes.