Flirting with disaster

“Gloomy and more uncertain” – this is how the IMF has chosen to title its July World Economic Outlook Update – in which it cuts its baseline growth forecast for 2022 by 0.4 percentage point from 3.6 per cent to 3.2 per cent. There remains little doubt that the world economy is heading into a recession fuelled by downturns in China and Russia, caused respectively by a resurgence of Covid-19 and the Ukraine war. Growth is slowing and inflation is rising in major economies of the world including the US, Germany, China, and India. The reason for this paradoxical situation is that while it is putting the brakes on growth, monetary tightening is failing to have the proportionate dampening effect on inflation. There are fears that any further food or energy price shocks, requiring further monetary tightening, could tip the global economy into stagflation – high and rising inflation accompanied by recession. Against this forbidding backdrop, our central bank would have us believe we are better placed than other countries to weather these shocks. How much sheltered against these shocks can we really be when we are reliant on imports for everything from energy to food is anybody’s guess. Not to forget, we are reliant on debt markets and inflows from international financial institutions for our financing needs.

As things stand, though, a global downturn may be the least of our worries. The rupee’s unprecedented downslide against the dollar continues unabated and inflation is at historic high levels, both of which are eroding the common citizen’s purchasing power. The adverse macroeconomic conditions created by runaway inflation and tighter money are taking a heavy toll on business and industry. The auto sector is in deep trouble, with several automakers at least shutting down their plants partially. The telecom sector has informed the government they are struggling in the face of eroding profitability. Other sectors are feeling the crunch equally, with many SMEs contemplating bankruptcy as we write this. Weaning power plants off imported fuel looks like a good medium-term strategy to curb forex outflows.

At the root of the rupee’s perpetual slide is an imbalance in the supply and demand of the dollar, a chronic issue no doubt but its magnitude right now is through the roof. The issue itself is rooted in our longstanding disdain for the imperative of living within our means. Little do we realize that no nation can live large on imported luxuries without earning enough forex through imports. Well, now may be a good time to start thinking about cutting imports big time at least. The economic managers seem happy to reiterate every morning Pakistan is not about to default – in effect confirming that the country continues to teeter a hair’s breadth away from that grim eventuality. They seem oblivious to the idea that when forex inflows are dwindling, they should set about curbing the outflows. Given that foreign debt repayments are non-negotiable, that leaves us with imports.

Passing the full burden of fuel imports on to the consumers is all very well, but dampening the demand for example motor oil or cooking oil by pricing these essentials out of the common citizen’s reach is hardly an ideal or adequate answer. Besides, why must the people bear all the brunt? Why can’t the government save forex by curbing other imports by other, untouchable constituencies? A major factor contributing to this desolation of our economy is the political instability that has come to haunt the coalition government headed by Prime Minister Shehbaz Sharif. The government has to realize that managing the economy is about confidence to a large extent. You may be doing everything right but it will come to nothing if the markets don’t have confidence in you. The rupee’s slide is discouraging exporters from repatriating their revenues at a time when we are running a mammoth current account deficit. The way things are going right now, we may soon see Sri Lanka as a hopeful scenario. The sooner the government and its detractors mend their ways, the better.