Pakistan’s economy is geared to move towards a low-level equilibrium. The fear of defaults, which was mostly political in nature, is weaning off.
However, the people of this country are going to pay the cost in terms of higher unemployment and low growth. The brakes have been applied through combination of economic and administrative measures to control the current account deficit (mainly a reduction in imports).
This would trickle down in terms of a large number of job losses and low growth. Today, inflation seems to be the biggest problem. This would normalize in 10-12 months; but the economic slowdown is likely to stay.
The economy will move to a low-level equilibrium. Many compare Pakistan’s economy to an old car. It can run smoothly at a speed of 40km/h; but creates problems as you speed it up. And the problem will continue unless the engine is overhauled (solving the structural economic problems).
The recent euphoria in the currency and other markets is a result of subsided fears of default. The doubts over IMF board not approving the 7th and 8th reviews and friends not pledging the commitments have been set aside.
Intriguingly, a perception of both commitments has been firmed up after calls from the Chief of the Army Staff to the officials in the US and friends in the Middle East. That perhaps undermines the writ of the current coalition government.
It has failed to live up to its promises of being able to negotiate a better deal with the IMF and friends. It has also failed to bring the energy and food prices down. At least, these were their claims before the ouster of PTI government.
Few realise that these promises were destined to be broken. Politics in Pakistan is a euphemism for false promises. This is nothing new. The economic problems Pakistan is facing today are not just due to structural imbalances, fiscal and other leakages, and incompetence of successive governments; rather, it is a much wider problem.
In days when virtually all the commodities are facing a super cycle, what can a country like Pakistan do? The worst thing politicians could do was to add political uncertainty to the mix. The regime change also came at one such critical juncture.
It’s time when all the developing countries should join hands and raise their voice. Pakistan should have led developing economies from the front. By highlighting the contradictory policies that are being run at the global level where the focus is on the developed world while leaving three to four dozens of developing economies completely vulnerable.
The debt stresses are growing and weakening currencies are making the problem even worse. The traditional response is to increase interest rates to counter inflation. Instead, this has further exacerbated the challenge of eliminating poverty.
These issues have been boldly articulated by the Acting Governor of State Bank of Pakistan, Murtaza Syed, in his recent article published in The Financial Times. He categorically mentions that the countries at risk of debt distress will not easily forget if they are let down by the rich world at a moment of crisis.
Economic managers and central bankers of other countries should also raise their voices. It’s a common problem. As Murtaza Syed notes, the stress that developing world is facing is due two large forces which are beyond their control.
One is commodity super cycle due to uncertainty from Covid and its response in the form of historic tightening by the US federal reserves. The second is overreliance on debt as opposed to equity flows. High global interest rates and strengthening of dollar is making developing countries more vulnerable.
Then the invasion of Ukraine by Russia is only being seen from the lens of the West. The developed world and multilateral agencies are more concerned about their own economic woes and political agendas, leaving the poorer economies extremely vulnerable when the need to support them is of utmost importance.
The cost the poor countries are paying due to unwinding of developed world stimuli is unprecedented. Then, the multilateral agencies are uneasy about engaging with the new world in which China has emerged as a big investor and creditor.
The outcome is that countries in South Asia, Africa and Latin America are becoming collateral damage. The world has seen the socioeconomic cost people of Sri Lanka are paying. The cost in the form of growing inflation and higher unemployment is to be paid by many other economies.
The world needs to rethink the order. Otherwise, as Murtaza Syed warns, the poor countries will not easily forget how they were let down by a system that was meant to increase their living standards and protect them in an emergency.
And in Pakistan, the false narrative that the economic mess is solely PTI’s creation should be brought to an end without any further loss of time.
The country needs to place its political infighting on the backburner. Instead, the policymakers should make efforts that echo the sentiments of Governor SBP. Now is not the time to neglect developing economies.
Copyright Business Recorder, 2022