Tuesday May 30, 2023

Turbulent times

May 17, 2022

Pakistan has been in a number of balance of payments crises since its independence. However, the current balance of payments challenge is different from previous ones. The constellation is far more lethal – a charged political atmosphere, global commodity price hike, global slowing down of economic growth, global rising inflation, lingering uncertainty on the date for the next elections in the country, complexity of economic issues and a lack of home-grown solutions. Semblance, sobriety, prudence and common sense all need to come together for the country to sail through unscathed. Antagonism, recklessness, negligence and ineptness will have to take a back seat at this juncture.

The severity of the situation requires prompt responses on many fronts from none other than the political leadership in the country. After having worked with numerous leaders in Pakistan and abroad, over the course of years, one feels that the job of a politician is often quite tough. If anything goes wrong, people like to blame their politicians. Nevertheless, in times of hardship citizens often turn to their politicians to help them out. Pandemics like Covid-19, natural disasters and at times finding a job for their children are times when people stalk their constituency leadership. Today, when the economic indicators in Pakistan are deteriorating, the people are also looking anxiously towards political leaders.

Politicians globally spent as much as each country could afford during Covid times. The large injection of cash into the global economy, coupled with post-pandemic supply chain issues, has pushed up prices of just about everything. Add to that the Russia-Ukraine conflict and we are going through a major global turmoil. The world is on the brink of stagflation.

The post-Covid era has become a time of classic uncertainty as the central banks are thought to be behind the curve in slowing monitory stimuli. Governments have also been slow to wean off the fiscal stimulus. The prices of fossil fuel have added to the uncertainty. Gas and petrol prices are going through the roof partly because the Ukraine war has reduced energy supplies from Russia and partly because of disinvestment in hydrocarbons globally over the past few years. What a time to be alive.

We are all on the precipice of a global recession, rising unemployment and falling equity markets. If the global economy slows, as it is beginning to happen, and unemployment starts to rise, governments may have less policy instruments to help. This is an unpleasant time for the global economy – and an unpleasant time for our country.

In Pakistan the economic uncertainty has been driven partly by the exogenous circumstances. The slow action on fundamental reforms for decades, coupled with the current political change and the resulting delay in taking the tough decisions has exacerbated a lack of confidence. It is now obvious to everyone that the cost Pakistan is bearing due to policy delay by the government is unsustainable. Resultantly, the currency faces a freefall; the stock market’s mood is subdued, and secondary market rates are up.

Certainly, the nation finds itself in unchartered territory. Stagflation is also the emerging picture with high frequency indicators in April 2022 for cement and fertilizer sales pointing to a slowdown. On the other hand, our inability to move on upward revision of the prices of petroleum products has encouraged more imports, April 2022 showing a rise of 94 percent in imports of petroleum products compared to April 2021. April 2022 imports clocked $2.2 billion versus just $1.1 billion in April 2021. Price is a natural arbiter in determining the optimal consumption. Policymakers’ deliberate move to stop pricing signals has led to over consumption, smuggling, and hoarding. April has also seen the highest consumption of diesel recorded for a month at 918,000 tonnes in Pakistan’s history – this certainly has an element of hoarding and smuggling.

Our haziness in conveying prudency over populism is correctly causing a wave of despondency and anxiety. Such a mood if it continues, can cause more damage. All of us, without exception, want Pakistan to be led by great leaders, not a collection of independent populists. Macroeconomic stability and growth sustainability will be hard to achieve without addressing structural issues – a concept one drills often. But today is not that time. We need to get done with short-term sustainable solutions.

As much as one wants to keep an eye on future prosperity, right now economic stability and social cohesion is under threat. Concentrated management and coordinated decisions left to those with contextual knowledge, good gut and local expertise will help. Clarity of strategy with conviction of delivery on pending issues must be ensured and shared with the nation in unequivocal terms. Let us be straight with citizens. Today is probably the time for limited relief but the time to save Pakistan from falling into an abyss. New thoughts on conservation and rationing, and levy on high-income earners may also be helpful in the immediate.

The next election has the potential to be not only aggressive but also hopefully more transformational than usual. One area it must address is economic independence, which will ultimately lead to real independence in the comity of nations. Economic and social thinking has been largely outsourced, something we have let happen gradually and knowingly. It doesn’t have to be that way. That is serious food for thought for politicians, opinion-makers, thinkers and the academia.

For the political parties it’s time for some soul-searching of what they bring to the table when they assume power. We want those people in power who have an intellectual grasp of the major issues that face the country. Putting to work our own policy thinking may forge more desirable results, with balanced budgets, smarter unbundling of the energy sector, more efficient use of gas in the country, effective regulatory regimes, diversified exports, improved social sector indicators and a downward trending multidimensional poverty; indeed, a more impressive record for citizens.

There has to be an understanding that cash handouts and election outlays will fuel more inflation and interest rates rises. In addition, the leadership has to take Pakistan’s economic thinking beyond crops, cotton and cloth. We have to think about the quality of growth with smart cities, smart transportation, smart energy solutions and smart businesses. The spectrum of the political divide and the establishment have to side with proposed significant reforms to deal with the new inflationary world and entrenched budget deficits in Pakistan.

There is rarely a dull moment in the country’s history but what matters most today is that we collectively get the job done. However, policymakers have yet not been able to fully decode the gravity of the economic pressures and organize themselves to set the economy on a sustainable course.

The writer is former adviser,Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at: