Celebrating this stalling economy

The government’s political machine is in overdrive celebrating the first monthly current account balance surplus in two years. We are being told that the economy stacked $654 million in current account surplus in March, a massive improvement from the $36 million deficit posted in February. Trumpets are blaring all over social and mainstream media as if this were a singular achievement of Prime Minister Shehbaz Sharif’s economic team led by his economy czar Ishaq Dar. But do they really believe that the people are so clueless that they will join them in celebrating some imaginary economic turnaround even as the country’s economy is stalling? That, truly, is the main reason this surplus has appeared on the books. It is public knowledge that the government has applied a squeeze on imports through administrative curbs on import LCs and release of foreign exchange to pay off for imports. It has stopped repatriation of profits by foreign investors including some Chinese IPPs. Remittances have no doubt been helped by the rupee devaluation, closing the gap between official and curb market exchange rates, but the lion’s share of the surplus comes from import compression, which inevitably manifests itself as bankruptcies, industrial closures, job losses, and market disruptions and shortages hitting key commodities, manufactured goods, and services.

Small wonder, then, that our GDP growth rate has slowed to a snail’s pace, effectively putting the economy into a contraction. Needless to say, the virtual closure of imports now in effect will continue to exact a price from the economy in terms of industrial output for a few months after the curbs are lifted. It bears repeating that this myopic, non-serious approach bodes ill for the country’s economy that is crying out for bold decisions to correct its deep macroeconomic distortions. The right approach would be to put the development in the proper perspective and present it as what it is: A desperate measure to create desperately needed fiscal space for the government to push through painful economic reform to set the economy on an even keel. Perhaps it will help the government balance its budget for the purposes of the rejuvenation of a stalled Extended Fund Facility (EFF) programme from the IMF – although it remains to be seen how much the new numbers go towards placating the Fund staff, worried about the country’s high external financing needs.

Meanwhile, the thick pall of uncertainty shrouding the economy because of the curbs on imports and the elusiveness of the IMF deal continue to take a grim toll on the economy. Any residual foreign exchange inflows – whether from remittances or exports – are being used for debt servicing, and the supply is falling short by such a significant margin that the IMF staff is not convinced the country can stay solvent on all its payments. Essential commodities are playing hide and seek, and lifesaving drugs are vanishing from the market. It does not help that the government has not put out any convincing roadmap to take the economy out of the doldrums. Industries dependent on imported raw materials are struggling for breath. Running a surplus by effectively cutting down productivity means the country’s current account imbalance will bounce back with a vengeance the moment the import curbs are lifted. The drift is that the fundamental issues facing our economy remain as they were, and will roar back to their former unseemly and unsustainable levels the moment the squeeze of import curbs is lifted. This is clearly in line with the boom-bust cycles our economy has been hostage to. Not only has nothing really changed – but there is every indication that the numbers will get worse because some of the loss to business and industry will inevitably be irreparable. Not all businesses closing their doors because of import curbs will be able to bounce back when the government finally decides it is time to kickstart the economy once more. All in all, it is fair to say the economy had paid a very high cost for this current account surplus. The sooner the government focuses on real issues of the economy, the better.