‘Worst yet to come’

On October 11, the International Monetary Fund (IMF), in its biannual World Economic Outlook, said, “global growth is expected to fall from 6 per cent in 2021 to 3.2 per cent this year and 2.7 percent in 2023…” The IMF downgraded its forecast for the global economy next year and warned inflation will be worse than previously expected. The IMF further said that central banks around the world are facing difficulties in trying to “cool decades-high price increases without spurring a recession.”

The rate of inflation in the US hit a high of 9.1 per cent, a 40-year high. In the UK, the rate of inflation hit a new 40-year high of 9.4 per cent. The rate of inflation in Pakistan hit 27.3 per cent, the highest in 47 years. In the US, the Federal Reserve, America’s central bank, in its attempt to rein in soaring prices, has pushed interest rates to the highest level in 15 years. The Bank of England, in its own attempts to tame inflation, has jacked up the rate of interest to its highest level since 2008. The Karachi Interbank Offered Rate (KIBOR), for instance, has nearly doubled from 8.5 per cent last year to 16 per cent now.

For the global economy the engine of growth is the US economy. In the US, the Federal Reserve’s aggressive interest rate policy has so far meant two things: the stock market has lost 25 per cent of its value and the housing market has crashed. The IMF has now downgraded its US economic growth forecast to one per cent. For Pakistan’s exports the engine of growth is the US. Bilateral trade between Pakistan and the US hovers around $8 billion and the US is the only country with which Pakistan enjoys a billion-dollar surplus. If the US is to grow by one per cent, Pakistan’s exports to the US may even contract.

The IMF’s estimate on global GDP growth for this year is 3.2 per cent down from 6 per cent seen in 2021. For Pakistan, the IMF has projected GDP growth of 3.5 per cent and the rate of inflation at around 20 per cent. Lo and behold, the IMF’s growth estimate for Pakistan is “based on information available as of the end of August and does not include the impact of the recent floods.”

On the currency front, the dollar is the king. The British pound is down to a historical low. The dollar rose to a 24-year high against the Japanese yen. The euro at $0.9695 remains under pressure. The Pakistani rupee is the only one swimming against the global tide where every major currency has taken major hits against the mighty dollar. In an extremely competitive global export market, an overvalued Pakistani rupee will do two things: make our exports relatively more expensive and stimulate the consumption of imported items.

Pierre-Olivier Gourinchas, the IMF’s economic counselor and director of research, said: “In short, the worst is yet to come.” The global economy is up against five big challenges: high rates of inflation; high rates of interest; fast rising global debt; crashing housing markets around the world and a never-ending war in Ukraine. For Pakistan’s economy add another challenge: floods. Ladies and gentlemen, tighten your belts, please.

The writer is a columnist based in Islamabad. He tweets @saleemfarrukh and can be reached at: farrukh15@hotmail.com