The celebrations are underway. Amid self congratulations by government officials for steering the economy towards stable waters, their corporate sector counterparts are rejoicing in the pool of lower inflation, two-year high forex reserves, base rate cut and ensuing hopes of economic turnaround. The stock market is up, with benchmark KSE soaring to 91/2-month high on Friday, while long term bond yields are also trending upwards.
But the worrying fact remains that markets and market men are often short sighted with an inherent bias to punt on the slightest possibility of growth- the bias being proven more recently by the global financial and economic meltdown. The current enthusiasm, in the absence of substantial unquestionable evidence of recovery, both abroad and at home, augments that worry.
The famed doom seer, Dr Nouriel Roubini - who was one of the very few who foresaw the global crisis a year before it started and has been right every step of the way - fears there is a rising risk of a double-dip W-shaped recession. "The recovery is likely to be anaemic and below trend in advanced economies and there is a big risk of a double-dip recession," warned the NYU professor in a recently written article in Financial Times.
Part of his argument was based on rising oil, energy and food prices that are now rebounding faster than economic fundamentals warrant, and could be driven higher by excessive liquidity chasing assets and by speculative demand as cheap money gradually finds its way to the market.
If Roubini's argument is taken at its face value, then we have had it. The price of crude oil - Pakistan's biggest import - was recently seen flirting with its highs again in the international market and if successfully breaks the $74~$76 barrel mark, which so far it has resisted, that will break our backs even harder. This coupled with the likely increase in power tariffs by end December can make the toughest nerve jittery.
And if global economy subsequently rolls back again in accordance with the feared 'W' shape, then the consequences will be even more serious for Pakistan. It would imply a shortfall in the materialisation of Friends of Pakistan pledges, if materialised at all, while eroding chances of foreign direct investment in the country. Likewise, the outflow of foreign portfolio investment - they key driver of bulls' resurgence at KSE -- can also be expected.
In the absence of these, our reliance on external debt becomes inevitable. But then, given the rising trends in external debt-to-GDP ratio, the country's fiscal books don't have much space to accommodate, without being caught in a debt trap.
This is not scaremongering. Adnan Mazarei - the Washington-based IMF Mission Chief for Pakistan - expressed similar fears last week. Mazarei told Reuters in an interview that people shouldn't think Pakistan is out of the woods because the global economy is in a very shaky situation and the government budget is still weak, output is weak, inflation is still high and confidence hasn't been restored.
His comments came just weeks after the IMF's latest country report on Pakistan cautioned that deflation momentum could be endangered by higher oil prices, electricity tariff increases, higher wages, and the fiscal expansion. "Accordingly, a more active monetary policy may be needed to manage inflationary pressures," noted the IMF report.
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