ISLAMABAD - Robust recovery of Pakistans economy is still uncertain despite improvement in some macroeconomics fundamentals, as economy continues to face serious challenges on both external and domestic fronts. According to the report issued by Pakistan Institute of Development Economics, economy is facing problems on internal as well as external front. Internal structural problems persist in the form of power shortages, and law and order situation. While external situation is not optimistic as global economies recovery continues to remain weak, not boding well for our exports and availability of external finance. The report stated that current account balance showed improvement in the first quarter of fiscal year 2009-10, declining to $532 million from $4.26 billion during the same period a year ago. There are two warning signs in this development including improvement owes to a surge in the foreign remittances while secondly trade gap is beginning to widen again as import growth has outstripped growth in exports in Dec 2009 on a year-on-year basis. According to the report, high cost of inputs, power crisis and dampened external demand pose substantial barriers for rapid recovery of exports while imports are likely to increase due to upward trend in oil and other commodity prices. Monthly Consumer Price Index (CPI) reveals a constant upward trend, though December 2009 witnessed a slight decline in the index. The recent increase in the electricity and gas tariffs will exert an upward pressure on general price level. So, in all fairness, inflationary pressures will build up again. It is interesting to note that the present policy stance completely disregards the supply-side imperfections that inhibit price adjustments in domestic markets. The wheat crisis during Ramadan and the present sugar crisis reflect governance issues (cartelisation, hoarding) in the domestic supply chain and cannot be tackled through monetary policy alone. The support price mechanism also needs review. Last year, the support price for wheat was fixed at Rs 950 per mound when international wheat prices were going down, without realising its impact on inflation later on. Further, controlling inflation has been problematic due to depreciation of Pakistani rupee, which inhibited pass through of lowered international oil and other commodity prices to domestic consumers in the aftermath of global economic crisis. These prices are showing upward trend again, therefore, domestic prices will become under pressure even more. To provide further impetus to the sluggish economy, the State Bank of Pakistan again revised the policy rate downwards by 50 basis points to 12.5 per cent in November 2009. This easing of monetary policy without taking care of supply-side bottlenecks is likely to build inflationary pressures in the economy. Due to weak economic growth globally and law and order situation in Pakistan, Foreign Direct Investment dried up. Pakistans external liabilities soared by almost $3b during the first quarter. This does not augur well for the fiscal balance in future as if the increase in external debt remains consistently unmatched by GDP growth and foreign exchange earnings, then Pakistan may once again face debt-servicing difficulties. Fiscal activism is also evident as PSDP for 2009-10 (421b rupees) is almost twice the PSDP for 2008-09 (219b rupees, revised). Total expenditure in the first quarter of FY-10 increased by about 25pc compared to the same period last year. This fiscal expansion is worrisome, especially when efforts to raise additional sources of revenue have not borne fruit. Increased government expenditure in the past two quarters on account of war on terror, the IDPs and ambitious expenditure outlays by provinces combined with lax taxation efforts do not bode well for fiscal consolidation. Continued dependence on external sources of finance in an environment where global economic recovery is sluggish adds to uncertainties regarding the financing and size of fiscal deficit.