Economic turnaround, an uphill task

LAHORE: Caretakers are not in a position to turnaround the economy anytime soon, as they inherited extremely high inflation, high interest rates, low foreign exchange reserves, declining exports, soaring imports, and a huge fiscal deficit.

Any promises made on potential of different sectors would not materialise unless it adopts a comprehensive approach to address these complex economic challenges. There is already a huge trust deficit between the common man and the government. Failure to make improvement in the lot of the people would further erode that trust.

Our economy currently is in a precarious condition. Things are likely to go worse for a while as the first week of the caretaker government saw further increase in inflation, decline in rupee value, and increase in petroleum products.

The global situation is also challenging. Textile and apparel trade is under stress, and crude oil rates are increasing. The government is helpless in this regard. We are facing these difficulties because our hands are tied on account of scarce resources and a heavy debt burden.

Under these circumstances, the government should prioritise issues starting with measures to restrain inflation. High inflation erodes people’s purchasing power, disrupts economic planning, and can lead to social unrest.

Taming inflation should be a priority, as it affects the well-being of the general population. The government can take measures such as tightening monetary policy (it was a folly on part of the central bank to keep its policy rates unchanged), controlling money supply growth, and implementing targeted price controls where necessary.

While addressing inflation is important, the government should also work to gradually reduce its fiscal deficit. High fiscal deficits have led to increased government borrowing, which in turn has put upward pressure on interest rates and inflation.

Implementing prudent fiscal policies, including cutting unnecessary spending and increasing revenue collection through fair taxation, can help reduce the deficit over time.

To improve foreign exchange reserves and address trade imbalances, the government should focus on promoting exports. This might involve providing incentives to export-oriented industries, investing in research and development to create innovative products with global demand, and negotiating trade agreements that open up new markets for domestic products.

Controlling imports is also crucial to reduce pressure on foreign exchange reserves. This could involve imposing targeted tariffs or import restrictions on non-essential goods that are contributing to the trade deficit.

The goal is to encourage domestic production and reduce dependency on imports. The government would have to move carefully though, and not strangle imports of essential raw materials.

Managing foreign exchange reserves is essential to stabilise the currency and avoid abrupt exchange rate fluctuations. Despite the agreement with the IMF, foreign exchange reserves have not increased to the targeted level.

The only chance of increasing reserves in the short-term is the materialisation of promised foreign investments in various projects by the Middle Eastern countries. Exports would take time to move up. Workers remittance are also on decline, with more efforts we may be able to bring them to last year’s level.

Addressing high interest rates is important for both businesses and consumers. High interest rates can discourage borrowing, investment, and spending, which can hamper economic growth. The government can work with the central bank to adopt appropriate monetary policies to gradually bring down interest rates without fuelling inflation.

These issues are interconnected, and addressing one can have implications for the others. A holistic and coordinated approach is necessary. Additionally, the government should communicate its strategies clearly to build confidence among citizens, investors, and international partners.

Ultimately, the priority order might need to be adjusted based on the severity and urgency of each issue, as well as our specific economic circumstances. Seeking advice from economic experts, both domestic and international, can also help in formulating an effective strategy.