Economics is not an absolute science; and there can be multiple interpretation of a country's economic health, especially when it is emerging from a lull period. The short term indictors of Pakistan economy, be it GDP growth, inflation, foreign exchange reserves, fiscal and current account deficits, have relatively been better in the last two years.
However, there are weaknesses in the growth story, challenging sustainability of economic stability. Economists and commentators, who are not in government but used to be the policymakers in the past, are most of the time narrating the dark side of the picture and in the process undermine the real recovery.
On the flip, the Finance Minster defended the economic recovery in a longish article in this paper last week. His point of view is skewed towards the bright side and has totally ignored the underline challenges.
Sadly, none of the past or present policymakers and eminent economists provided a workable plan for a sustainable economic recovery. The rhetoric presented from both sides is becoming stale and everyone seems clueless on how to take economy on a sustainable high growth path in a tough political realm of this country.
The objectivity in the arguments is mostly missing and pre-decided conclusions are used to build narrative, by most. If we see Pakistan economic history of the last three decades; whenever economic growth touched five percent for a few years amid rise in foreign exchange reserves, it was followed by a severe balance of payment crisis - 1998 and 2008 crises are cases in hands. Is there another crisis in offing in 2018, or beyond?
One way to avert a sudden crisis, is to not let the economic bubble to grow. In case of Pakistan, history suggests that, balance of payment is the key concern, and to manage it, a policy tool used by many economies is to let the currency to depreciate slowly. That is an effective tax to non-essential imports and an inherit subsidy to exports.
However, there seems to be consensus amongst political elite, civil society, and business community to not let the currency fall unless it becomes unmanageable. There is a consensus on keeping it as a consumption based economy; and savings is discouraged by all - government, businesses, and households. There is protection for consumers by allowing cheap imports which we don't produce at home; and protection for producers by having duties on goods they manufacture or assemble. Everyone is happy in a protectionist environment; and oligopolies are allowed to build while consumption is boomed on imports.
Pakistan is not a super power to sustain on this model; none of the economies moved up the ladder of development using policies to protect consumerism discourage competition in producers' markets. There are number of growth stories in Far East, and India, where savings by households and competitiveness of export oriented industries did the trick.
The obsession of sticky currency is not confined to Nawaz Sharif style of economic management; the technocrats in Musharraf regime did the same. Our businesses are not innovative, the entrepreneurship is largely missing in the country. The so called business community is in quest of making short gains through protectionism when the money is coming in the pocket; and that creates assets bubbles.
During 2002-07, when the economy was growing at high pace while the interest rates were low with foreign fund pouring in the economy; the businessmen instead of reinvesting in the businesses were more interested in buying real estate from abnormal profits and were having a lavish life style.
At that time, foreigners were investing in the country; and that had created many jobs. But virtually all the investment was for local consumption - be it telecom, financial, oil & gas or FMCG sector. The policymakers at that time, were jubilant on incoming FDI. But the growth was simply not enough to sustain high oil prices run; and the IMF had to bail Pakistan out. Had the money flowing in, and the conducive environment been used for exports, Pakistan could have sustained the high commodity prices cycle (2008-14).
During 2014-todate, low commodity prices cycle amid foreign loans have helped Pakistan build foreign reserves. Economic growth is picking up again. There is nothing much to talk about foreign investment, rather domestic investment along with CPEC related loans are building the momentum this time around. The industries, related to infrastructure and power generation, are expanding today. Yet again, the expansion is for domestic consumption and nothing supports exports.
In between the two high growth periods, there was an era of low growth and high inflation (2008-14); but the savior of the external economy was home remittances surge which is saturating now. The question is in the absence of any foreign exchange earnings growth in the form of exports and remittances, the economy is bound to collapse on balance of payment eventually.
The commonalities between 2002-07 and 2014-todate are foreign soft loans and aid, previously they were from the US, and now it's by China while multilateral donors are common in both. The difference is previously it was FDI, now it is debt from foreign capital markets; both are bound to leave the country either in the form of dividends or debt servicing. However, the former may well be a better option, but it's surely not the solution.
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