Governor State Bank of Pakistan Reza Baqir during the flag-hoisting ceremony on 14 August reiterated that the “economic reform agenda is bringing stability to the country’s economy; some stability has already been witnessed and based on these reforms the country will get long-term economic growth which will benefit the low income and middle class.” Such sentiments have been repeatedly expressed by Prime Minister Imran Khan’s newly installed economic team – Advisor to the Prime Minister on Finance Dr Hafeez Sheikh was appointed on 20 April 2019 while Baqir was appointed on 4 May 2019 – in response to the severe hardships being experienced by the low and middle classes of this country as a consequence of the policies the two agreed to implement with the International Monetary Fund (IMF) team on 12 May 2019.
The oft quoted statement by John Maynard Keynes, considered the father of modern economic theory, is “in the long-term we are all dead”. Critics of Pakistan’s economic team therefore rightly challenge their claim that reforms would achieve long-term economic growth as the long-term is defined at best as 39 months (the duration of the Fund programme) or at worst is undefined.
Prime Minister Imran Khan maintains that the beneficial impact of the Fund programme would be evident within six months to a year, a view reportedly substantiated by his economic team in his private interactions with them, though Sheikh directed by the Prime Minister to unveil his long-term programme on 26 May simply restated that this year “will be the year of stabilisation for the economy, during which the focus will be on saving the economy from different vulnerabilities, and after achieving the target of stabilisation, the journey to growth will start.”
Perhaps the administration would do well to revisit the programme risks identified by the IMF in the staff-level report which highlights that “other risks, including those related to domestic security conditions, global trade, growth in major trading partners, oil prices, and tighter financial conditions, could exacerbate these challenges” – challenges associated with failure to implement the programme conditions due to their severe socio-economic impact on middle and low income groups. Baqir picked up on one domestic challenge identified by the Fund out of several (including fiscal slippages, failure to maintain an adequately tight monetary policy which could lead to exchange rate overshooting and second round effects to inflation, lack of progress in governance and institutional building, failure of provinces to deliver and failure of bilaterals/multilaterals to deliver on their commitments) and stated that continuity of policies is our biggest challenge.
Baqir as SBP Governor agreed to implement a market-based exchange rate which implied that it would no longer set the limits with banks within which the rupee would be allowed to fluctuate and to raise the discount rate to mop up excess liquidity. The former policy accounts for an increase in rupee terms of essential items particularly oil and products, a major import item for the country, with negative across the board repercussions on domestic inflation that is now in excess of 11 percent. The rise in discount rate has contracted credit to the private sector, with a consequent negative impact on productivity and this from an administration that constantly states that private sector would lead the impetus to growth. Growth of large-scale manufacturing declined last year, a trend that is unlikely to be reversed this year given the country’s economic teams’ and Fund’s projected growth rate of 2.4 percent, while anecdotal surveys carried out by Business Recorder reveal that small and medium enterprises are complaining of a decline in clients and have begun laying-off workers. Additionally, by and large, the private sector has been unable to raise salaries with the objective of keeping take home pay at par with the rate of inflation, though the government has raised salaries of public sector employees out of enhanced budgeted collections from the taxpayers’ money, and in some instances private sector staff has been subjected to the prospect of accepting a decline in salaries or else face redundancies. All of the foregoing fall in the category of ‘Pain’ that has to be endured to put the economy back on the right trajectory. It would therefore, be helpful if the economic team was to define what they mean by ‘long-term’. Is it the successful culmination of the current IMF programme or as the prime minister has stated on more than one occasion “six months” for the people to be able to see any mitigation in their pain that they are suffering as the cost of our economic waywardness of the past decade?
To conclude, there would be many a slip between the cup and the lip especially given President Trump’s trade war with China leading to expectations of a global recession, the escalation in conflict with Modi’s India after his unilateral and illegal decision on Kashmir.
(This news/article originally appeared in Business Recorder on August 16th, 2019)