Thursday June 30, 2022

Economic politicking

May 03, 2022

Overcoming the current external solvency challenge is reminiscent of how things were in 2018 in Pakistan. The need to tap friendly countries to shore up reserves, finding oil on deferred payments, new international commercial borrowing, rush to roll-over bilateral and commercial-bank maturities, and a dash to the International Monetary Fund (IMF).

The drill is almost like a page from the playbook. However, we must not forget that continuing to borrow to fund future recurrent spending comes with a cost. The drill has been necessary now, but this is not a new way forward for future normal times – it is an old way backwards.

The actions on all the above fronts need to reach finality to create macroeconomic stability and semblance in markets even for the short term. The markets have yet to be convinced that we have things under control. The rupee continues to struggle, the country’s default risk as measured by five-year credit-default swaps is at the highest since 2013, and the six-month Kibor is at 14.25 percent – the highest in 13 years – while treasury bills rates are approaching 15 percent, the highest in 24 years.

The exogenous circumstances are not helpful in easing the pressure on imports in Pakistan. Global outlook has deteriorated with the geo-political conflict, supply side disruptions and a resurgence of Covid in China. Geo-political uncertainties have disrupted the supply of wheat, corn, gas, oil and metals, as well as pushed up the price of inputs such as fertilizer for agriculture. These conditions have led to warnings of a future global food crisis and a possible increase in world hunger. Rising prices have a devastating impact on the vulnerable; the story in Pakistan is not much different. The average inflation has risen to a high 11.02 percent for the first ten months of FY22. The next few months, however, may see even higher elevated levels to nearly 15 percent depending on the pass through of energy and petroleum prices.

The era of wishful thinking that Pakistan can grow itself out of trouble is long over. Those who come to grips with this fact now will feel a lot less unwise in the future. Growth episodes of 2018 and 2022 are a reckoning for policymakers and commentators everywhere in the country. External account vulnerabilities have highlighted balance of payments as a binding constraint on sustaining a worthwhile growth momentum in Pakistan. In both episodes, the country has been forced on a contractionary path of adjustments within a short period, to control widening deficits. This is a harsh reality – one that should shock the nation into reform mode for a new growth framework beyond easy money, rents, subsidies, amnesties, incentives to non-tradable sectors, low value exports and protectionism.

At the same time, avenues for growing the Pakistan economy are being made more difficult by a less supportive global picture in the medium term. The IMF’s revised World Economic Outlook paints a less promising picture than earlier. It is rare for the IMF to lower its projections for economic growth just one quarter into the calendar year. However, it has reduced its growth estimates for 86 percent of its 190 member countries. It has cautioned a decline of almost one percentage point in global growth for 2022 – from 4.4 to 3.6 percent. The lower growth estimates are accompanied by a considerable upward revision in projected inflation. All this not so good news is accompanied by a rising uncertainty.

We all recognize that sustained social and human progress requires long periods of high growth. For sure, countries need to pursue smart growth policies. In today’s context, it means both inclusive and green growth. Given this understanding, Pakistan finds itself in a difficult place.

There is more to running an economy than memorizing economic statistics. Any smart politician can narrate economic figures. Eventually, what really makes a difference is the policies and the capability to prosecute the case with the public and a disparate crossbench in the parliament. For Pakistan, it means even more. It means understanding that the growth engine is broken, fundamentally flawed and in need of reforms.

Reforms that deliver higher productivity, efficiency and budget improvements will need to occur as a matter of national urgency, if there is a chance of prosperity for Pakistan. In fact, a decision to do less is an active decision to see things deteriorate and consign future generations to a Pakistan with fewer opportunities.

The ideas have to find a major role for the private sector and the 220 million people of the country. It doesn’t in any way mean that governments do not have an important task. It is just as important to recognise that the government does not always possess the solution to every problem. The energy-sector chaos in Pakistan is a glaring example of this. A state dominated energy sector is scrambling to find imported fuels whereas the solution lies in the difficult transformation to establish an efficient energy market. The bleeding of decades in the energy sector is simply heart wrenching.

Pakistan is a blessed country. It does create opportunities, when our governments don’t unnecessarily interfere in the lives of their citizens or over-regulate business. The first principle of good government is the awareness about its true capacity and its limitations. It is crucial for governments to balance political risks with policy daring. This said politics must be about ambition to make the country turn a corner. In the years ahead, whoever is in government will need to take tough decisions to secure the future – decisions which think beyond expediency and truly about building a competitive industrial and agricultural base for Pakistan. Such a narrative must be explained to the nation.

We must recognise that reforming the key sectors will be hard. It will take a long time, there will be ups and downs, and it will not always be popular, but it has to be achieved against the odds. The dividends will be plenty – lower tax rates, greater prosperity and greater opportunity. The necessity of reform will need to be clearly communicated to the people of Pakistan, and there will need to be a reasonable level of co-operation and consent from whoever is in opposition. That’s the task of governing Pakistan.

We have to forge the debate and remain optimistic that policymakers and political parties will provide a platform for a contest of ideas to help support long-term productivity and efficiency in Pakistan. The next election campaign, whenever it happens, needs to be the place when such truths of Pakistan’s prosperity are properly debated and communicated to the citizens.

The writer is former adviser,

Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at:


    Shakil Durrani commented 2 months ago

    Dr Khaqan Najeeb's articles are scholarly. These would be more helpful if concrete and precise solutions are provided as well. For instance what decisions to take, short term and longer period, to address the power sector woes. Crisp and precise please.

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