Has the major intervention in the exchange rate by the federal government improved the country’s marcoeconomic outlook? Not if the World Bank’s latest report is to be believed. In ‘South Asia Economic Focus Spring 2018’, the World Bank has once again stressed that the country’s macroeconomic stability is a major concern in the near-term. But what is strange is that the World Bank has proposed remedial measures that only show an impact on key areas of concern, such as balance of trade, in the medium term. Once again, the short-term measures asked for are further depreciation of the rupee, couched as exchange rate flexibility, and fiscal consolidation. No sound economist would argue that the impact of exchange rate flexibility on improving exports is immediate. However, the depreciation of currency can have a much more significant impact on inflation in an import-dependent economy like Pakistan’s. There is a need for basic economic sense to be maintained before going towards a further depreciation of the rupee. Similarly, it is hard to control budget deficits without undertaking the kind of slash in developmental budget that the current government seems to have committed to already. But once again one must wonder how Pakistan can do so at a time when the government is committed to mass infrastructural expenditure under the terms of the China-Pakistan Economic Corridor.
The World Bank seems to agree that CPEC is behind the recent acceleration of Pakistan’s economic growth rate. But it continues to shy away from commenting on the impact of CPEC on Pakistan’s short-term balance of trade and its fiscal health in terms of debt. Contained within the report is an indication that pressure will be exerted on the caretaker government to take the unpopular measures that the federal government has appeared to resist. This is a space that will need to be watched. Unelected governments cannot be allowed to make major economic decisions. The big question is whether Pakistan will be able to improve its trade deficit. The World Bank is not optimistic on this front – and this is a realistic picture. That Pakistan will need to borrow more money to bridge the deficit is a real prospect. There are no short-term fixes available for the degeneration in the export sector that has continued on this government’s watch. The World Bank is also not optimistic about Pakistan’s economic growth improving next year, as has been predicted by the current government, and in fact has said there may be a slow down. The report is a worrying one, but it should not cause Pakistan’s policymakers to panic. There needs to be a calmer assessment of what will work for Pakistan’s economy before taking any major decisions. It seems this may not be the case with Advisor to PM Miftah Ismail in Washington for talks with the World Bank and IMF weeks before the budget announcement. Pakistan’s own economic priorities must come before pleasing the World Bank.