Despite some indicators starting to flash somewhat green, i.e., a sharp drop in current account deficit last month, the economy is wobbling towards a quasi-crisis on internal front with budget deficit yawning like there’s no tomorrow and inflation trying to go scale new peaks this ongoing financial year.
The consumer price index (CPI) based inflation that hiked to 8.2 percent February 2019 is now set to break record by crossing last month’s figure in March 2019, mainly because of low base compared to the same month of the last fiscal, but administrative price increase in utilities and depreciation of rupee against dollar is tolling heavy on the lives of voiceless Pakistanis.
At this juncture, the International Monetary Fund’s (IMF) newly appointed Mission Chief Ernesto Ramirez Rigo is due on a two-day visit this week for making renewed efforts for evolving staff level agreement with Pakistani authorities.
This visit may pave the way for breaking a lingering impasse between the two sides and the actual breakthrough is expected on the eve of upcoming annual spring meeting of the IMF/World Bank scheduled in Washington DC from April 10 to 12. Pakistan’s delegation led by Finance Minister Asad Umar will attend this meeting of Breton Wood Institutions (BWIs).
There is need for putting economic developments in proper prospective. First of all, the Pakistan Tehreek-e-Insaf-(PTI) led regime is thumping over its achievement on external front of the economy as the current account deficit substantially decreased from $1.2 billion on per month average to $356 million in February 2019 mainly because of a surge in remittances and reduction in imports. However, the underlying structural problems continue to persist on internal and external fronts of the economy.
The remittances saw a double-digit growth and responded to 40 percent depreciation of rupee against dollar in last one year as Pakistanis living abroad sent money home to take advantage of it. But it was also assumed that this depreciation would benefit in terms of increasing exports but so far the desired results are nowhere to be witnessed. It indicates the country does not have exportable surplus so in short- to medium-term the exchange rate depreciation would not benefit the exports. One top official of finance ministry argued while quoting a study by renowned economist Dr Hafiz A Pasha that exchange rate depreciation could take 12 to 18 months to achieve positive results on export front. So this time lag should also be kept in mind.
In his brief chat with the media last week, Dr Hafiz A Pasha had pointed out another worrying aspect that on one side the current account deficit decreased but the country’s ability to get more dollar inflows in shape of disbursement from its traditional partners also shrank due to which the foreign currency reserves were still depleting despite getting generous help from friendly countries.
It is a fact that Pakistan had so far obtained over $5 billion from friendly countries including China, Saudi Arabia, and Unite Arab Emirates (UAE) but still the reserves held by the SBP were standing at $8.8 billion on March 15, 2019. With possible injection of $2.1 billion from China next week it would be increased to $10.8 billion.
The present government in its prescription for fixing economy dubs the large macroeconomic imbalances as the legacy of previous government led by Pakistan Muslim League-Nawaz (PML-N). The PTI mantra-mongers argued that poor economic management by the PML-N government added to the imbalances as they left the office with an economy on the verge of a macroeconomic crisis.
In the absence of government-managed adjustment plan, the macroeconomic imbalances would grow in magnitude, forcing the economy to make its own disorderly adjustment.
The PTI in its stance said with no-adjustment (i.e. full-blown crisis forced market adjustment) not being not an option, a decision had to be taken on the pace of managed adjustment.
One option was to frontload the corrections, removing the imbalances. The other was to take a more gradual adjustment path maintaining a balance of sharp price adjustments when needed and, at the same time, vigorously pursuing structural reform to strengthen the foundations of the economy. First, the high cost of full adjustment in the first two years would fall disproportionately on the poor, and the public safety nets would not fully mitigate that cost.
These had been unaddressed despite commitments given to domestic investors and the international community and back-loading structural reforms (to achieve higher tax revenue, lower subsidies, greater international competitiveness) had resulted in their abandonment.
Not only the stabilisation program initiated by the last government, but also almost all previous stabilisation programs remained unsustainable because they were not accompanied by measures to address the structural problems, leading to periodic recurrence of instability.
It is easy to blame all previous regimes for economic ills but finding out a permanent solution requires in-depth analysis, right prescriptions, good strategy, and execution of right policies without compromising the broader interests and most importantly weeding out the vested interests. There are many ifs and buts and the PTI will have to deliver.
Without relying on miracles or dreaming of striking some kinds of economic jackpots, we have to fix the underlying structural problems just right now. The postponement of right kind of reforms is no longer a solution to our problem as we have successively failed at it in the past, but now the status quo approach would only increase the pain of adjustment and nothing else.
The only solution is to fix the economy as early as possible. The delaying tactics will only add to the cost and hurt.
The writer is a staff member