Why the coming year will be difficult

If you were born in Pakistan, grew up in it, if it is an area of research for you, it is a fair guess that you think things have never been this difficult – economically, politically and socially. All spheres of our interaction with the usually linear superstructure seem to have become fuzzy in what appears to be a heartbeat.

The economic situation we find ourselves in has been a long time coming. What makes it worse is the same thing that makes it better: it’s global. Within our region, all countries – apart from India to a degree – find themselves in a pressure cooker situation that Pakistanis are experiencing. Inflation is high and does not intend on tapering off. The greenback is precious and is flying out of the region as forex reserves dwindle.

Here is Pakistan in a snapshot. As we sit at the dawn of a new financial year, the country has less than two month import cover. Inflation is high recorded in the early-mid teens on a monthly basis – higher in rural areas than urban areas. We have witnessed buoyancy in large-scale manufacturing, the usual robust performance in the services sector and agriculture has had nothing to write home about. The energy crisis abounds, and meaningful employment has not been created. We have at our hand a structural issue.

Remember: Pakistan imports fuel and food. It is a big country which had a V-shape economic recovery after the pandemic. So, Pakistan imports a lot of fuel and food. A V-shape recovery means an immediate increase in economic growth after the slowdown that the pandemic brought. So while the economy plummeted in 2020, it gained momentum in the following year growing at 5.74 per cent in 2021 and at an astounding 5.97 per cent in 2022. While this will seem counterintuitive, this spurt of growth plays a big part in the position we are in. The other part is global pressure – the surge in global commodity prices, Russian invasion of Ukraine, a globally stronger dollar, rising inflation in the developed world and emerging economies.

Here is the detail on the first part. Pakistan experienced a high growth rate post-pandemic because it opted out of the lockdown policy and rode the wave of record breaking worker remittances. Despite growing inflation, consumption in Pakistan has grown. It was 80.5 per cent of the GDP in FY2020, it stands at 85.2 per cent in FY 2022. Investment was 14.8 per cent in FY2020 and crept up to 15.1 per cent in FY2022. Economies crumble when consumption is not met with investment and saving. That is exactly what has happened here today. When you hear calls for cooling down, we are looking at consumption and the mismatch with investment and ringing the alarm. When consumption increases, you consume more of everything. And Pakistan imports almost everything.

But just like Pakistan’s economy is wavering, so are economies where Pakistani workers work. Inflation is biting consumers and firms in the world as well. So, we simply do not have enough money coming in. Will this always be the case? No. Will this happen again? Sure. If we do not stop treating the economy as a nuisance that stands in the way of reelection. Also, crises are a salient feature of capitalism.

Here is the other part. People across the world are waking up to the importance of global supply chains, and what a big part of the world bread basket Ukraine and Russia are. Because the Russian invasion has not ended yet, it fuels uncertainty. Uncertainty creates panic and panic drives up prices of goods. Reduced supply also drives up prices. These factors combined explain the rising price of fuel and food commodities internationally.

So Pakistan finds itself in a domestic situation it is used to – we have never had sustainable growth and our economy occasionally runs out of steam, but an international situation which is tense and there is very little the world is willing to share. So there is no way forward but to make some very tough choices. Fuel prices in the country have started to be adjusted as a misguided subsidy is phased out. This will reduce consumption. Next up are energy prices, as they are adjusted and increased, the economy will cool down further. But it leaves the country better positioned to have a functional economy. A resumption of the IMF programme will send a positive signal to other lenders and international financial markets. That will bring dollars in the economy and we will finally have a bit of breathing room. If Pakistan comes off the grey list of the FATF it would be a welcome boon.

Just because political parties have (wrongly) convinced people that the government has the answer to every problem and is all powerful, does not mean it is true. There will be a readjustment across the board – governments, households, and firms. Pakistani governments have been spending money they do not have – worse, they have spent it on subsidies that make no economic sense but all the political sense. A subsidy that leaves people poorer tomorrow than they are today is a misguided subsidy. They have to stop.

The bottom line is that things are difficult, and they will be so for the next couple of months. They will ameliorate once the IMF programme is resumed. We will live poorer lives for the next few years and then we are most likely out of the woods – only if we keep true to reforming the economy. Any deviation now will cause irreparable damage because Pakistan is on a precipice.

The writer is a faculty member at Beaconhouse National University, Lahore. She tweets @izzaaftab