Battle of narratives confuses ordinary citizens who are less interested in politics and are more keen to know where the economy is actually heading, what they should expect in terms of growth and whether Pakistan can offer them a prosperous future.
Economy is the hottest subject these days. Political zealots from opposing sides pick and choose data snippets of their choice, build an argument and relentlessly attack the other party. On one hand, the Pakistan Tehreek-e-Insaf (PTI) social media machine keeps focusing on massive current account deficit and export decline during Pakistan Muslim League-Nawaz’s (PML-N) tenure, while the PML-N social media warriors rely on abundant ammunition provided by high inflation and slowing down economy.
This battle of narratives, however, confuses ordinary citizens who are less interested in politics and are more keen to know where the economy is actually heading, what they should expect in terms of growth and whether Pakistan can offer them a prosperous future.
Let’s first understand the origin of the present economic crisis.
For years, Pakistan’s foreign exchange inflows — earned through exports, foreign direct investment, remittances and official development assistance — have been lagging behind its forex outflows required to pay for its imports. But this gap increased considerably in recent years, thereby forcing the country to excessively rely on external borrowing. The problem was further compounded by the overvalued exchange rate that was held artificially high during the last government’s term. This overpricing made imports cheaper and exports expensive, further enhancing the trade deficit. As a result, the current account deficit went as high as about $1.5 to 2 billion a month, which became unsustainable. The PTI government sought help from friendly countries like Saudi Arabia and China and managed to get more than $6 billion in loans or deferred payments. But without working on reducing the current account deficit, even this didn’t last long.
The situation was no better on the fiscal front. Pakistan has been generating far less revenue than what it was spending, leading to huge fiscal deficits, which were again financed through borrowing. The state-owned enterprises kept on draining the exchequer and the circular debt kept on piling up, crippling the government. This unsustainable financial situation compelled Pakistan to knock at the doors of the International Monetary Fund (IMF).
IMF is considered the lender of last resort and provides a bailout to a country to avoid an economic crisis when no other lender is willing to step in. But in return, it puts down certain conditions for the borrower, to put its house in order. The same happened with Pakistan.
Pakistan has a resilient economy on the back of its 200+ million-strong population, abundant natural resources and a vibrant private sector. About two-thirds of the Pakistani population is youth, making it the youngest country in South Asia and skilling this workforce can do wonders for the country.
To immediately curtail the current account deficit, Pakistan had to significantly devalue its exchange rate to bring it in line with its market value. But this sudden devaluation overnight made imports expensive, including petrol, leading to a round of imported inflation. Along with consumer goods, industrial goods and raw materials also became expensive. Many industries such as automotive had to pass this increase on to consumers, putting their products out of reach of many, slowing down the consumer demand for them.
The government also had to raise prices of gas and electricity to reduce the fiscal deficit, fueling inflation. Mismanagement leading to food supply disruptions, such as wheat and flour crisis, also played its part in further pushing the inflation higher. In anticipation of the inflationary pressure, the government had already increased the interest rates. But these high interest rates, while curbing inflation, made borrowing expensive for the businesses, thus taking a further toll on their growth.
Factories had to cut down production. Unemployment rose. And the economy started to slow down. It was as if an over-heated engine was suddenly sprayed with a splash of cold water.
The tight fiscal and monetary policies, which were unavoidable to reign in out of control current account and budget deficits, also brought in inadvertent consequences making life hard for the people. And this is how the government ended up where it is right now. The inflation is still rising, growth is nowhere in sight and the government keeps on mulling over ways to cut corners to meet stringent IMF conditions.
The dark night of economic hardship will be over soon. But what matters is if we can take some hard decisions during this time, correct the imbalance between our public sector spending and income, develop our export base and pull Pakistan out of its perpetual reliance on foreign and domestic borrowing.
But all is not doom and gloom. Pakistan has a resilient economy on the back of its 200+ million-strong population, abundant natural resources and a vibrant private sector. About two-thirds of the Pakistani population is youth, making it the youngest country in South Asia and skilling this workforce can do wonders for the country. Not only does the country have 10+ million expats, forming the sixth-largest diaspora in the world, but their remittances have also been growing. Since the year 2000, remittance inflows to Pakistan have grown by 19-20 times in real terms. Moreover, in recent years, China has pumped in billions of dollars, as part of the China-Pakistan Economic Corridor (CPEC), improving Pakistan’s infrastructure and putting it on the Belt Road Initiative (BRI) map. The improved connectivity can yield sizeable trade and investment dividends for Pakistan.
Given this tremendous economic potential, it is quite likely that as soon as the government will ease out the fiscal and monetary policies, the economy will rebound. But that growth can only be sustained if our trade deficit does not go out of control, our manufacturing sector has the capacity to expand and we can generate enough investments to sustain the growth momentum. And for this to happen, our public sector needs to be more efficient and give more space to the private sector to grow. It also requires that the government should reduce its non-productive expenditure and increase public investments, broaden the tax base and use the tax money effectively to stimulate the economy and stop using state-owned enterprises like Pakistan International Airlines (PIA) and Pakistan Railways (PR) for patronage and instead make them self-sustainable and profitable entities.
The dark night of economic hardship will be over soon. But what matters is if we can take some hard decisions during this time, correct the imbalance between our public sector spending and income, develop our export base and pull Pakistan out of its perpetual reliance on foreign and domestic borrowing.
