Shocks and Pakistan’s economy

‘We are living in a time of overlapping emergencies: the pandemic is not over, climate change is a reality, and geopolitical stability has reached a nadir. This requires us to reimagine economic policymaking as a form of disaster preparedness.

We need to be able to employ both market and non-market coordination to respond to the shocks that inevitably occur as crises multiply.’ Excerpt from a recent Project Syndicate (PS) published interview with noted economist, Isabella M. Weber

In 2018, Pakistan’s economy was suffering from a deep current account deficit, for which an Extended Fund Facility (EFF) programme with the International Monetary Fund (IMF) was negotiated in 2019 to deal with balance of payments crisis, and also put growth on sustainable trajectory. Yet, the very next year, Pakistan like most of the world was in the grips of the Covid pandemic.

This exposed the country to high public health expenditure, and vaccine importing needs, on one hand, and the recession-causing pandemic required making heavy stimulus spending on the other. Hence, while the country needed to make strong institutional reforms, including reforming governance, and incentive structures, and taking the markets towards greater non-neoliberal regulation, the pandemic took the country to health- and economic fire-fighting.

While the pandemic shock was mostly exogenous to the country’s own making — apart from better Covid vaccine and overall health sector preparedness — yet the country suffered on account of ‘vaccine apartheid’, lack of any meaningful debt relief/moratorium, and important but inadequate provision of enhanced special drawing rights (SDRs) allocation, which came around year-and-a-half later in August 2021 since the start of the pandemic, and only to the tune of $2.75 billion out of a total global allocation of $650 billion.

Having said that, smart lock-downs, reorienting IMF programme towards more countercyclical policies — for instance, reducing both level of rates, and pace of increase in tax rates, and increasing development expenditure/stimulus spending — in the wake of the pandemic, some meaningful amount of stimulus spending, and significant incentives directed to mainly construction, textile sector, and to some extent agriculture sector led a sharp but nonetheless nascent economic growth recovery.

Yet, acute depth and longevity of pandemic, especially the phenomena of ‘long Covid’ and multiple Covid virus-mutating waves meant rise in absolute poverty. Inequality also rose sharply since growth recovery was neither broad-based in terms of economic sectors, nor across income groups, especially the middle- and lower-income groups.

This is because no broad-based institutional reforms were carried out, or perhaps the circumstances at hand — deep balance of payments crisis, pandemic, and global commodity supply shock — took away significant attention from the government to carry out any meaningful reform effort.

Having said that, the reform effort that was presented left a lot to be wanting in terms of greater needed effort, philosophical understanding of the shortcoming of severe neoliberal policy shortcomings. Moreover, it lacked a mission-oriented and purpose-driven approach.

Another important shock that was borne out of the pandemic was a global commodity supply shock, where supply remained well below recovering demand as pandemic receded overall. Lack of supply both as a result of purely demand-supply dynamics, and due to significant speculative/over-profiteering activity at the back of years of neoliberal assault in the shape of virtually unfettered markets, and diminishing role of government/regulation.

For instance, Pakistan being a net importer of oil, saw a massive increase in prices of oil in the international market after the crash in prices in the early months of the pandemic. Here, more than demand-supply dynamics, oil prices were reportedly raised by OPEC+ group of countries by keeping supplies artificially low.

In addition, speculative activity meant that wild swings in prices were seen within an upper band of prices — between more than normal profits to super profits, but significant profits mostly. Moreover, prices of many agricultural commodities also saw similar price increases, and profit-making out of speculative activity, rather than for instance through the shock of war in Ukraine, and its impact on prices of a number of commodities like wheat.

The shock of global commodity supplies before the war, which accentuated afterwards, meant that imported inflation increased in the country. Coupled with lack of meaningful financial support from multilateral institutions and bilaterals, and no significant debt relief on one hand, and on the other, rising inflation decreasing competitiveness, and lowering exports, not to mention weakening financial outlook due to falling foreign exchange reserves and their ratios to debt servicing capacity and import cover strength, reducing foreign investment inflows — where rising interest rates in the West to tackle inflation, especially in the United States, meant significant capital flight in developing countries, including Pakistan — all meant a weaker Rupee (PKR).

Once again, weaker economic institutional capacity, and inadequate level of governance and incentive structures, especially those that lowered transaction costs of economic exchange among economic agents, all meant that shocks greatly kept the economy unstable.

The impact of shocks became all the more pronounced in the wake of an acute procyclical IMF programme, even though another significant climate change caused shock – in which Pakistan had minimal role to play — in the shape of catastrophic floods in roughly one-third of the area of the country, affecting more than 33 million people, called for a counter-cyclical/non-austerity programme, meaningful debt relief, and enhanced allocation of SDRs.

Having said that, in this case as well, lack of institutional capacity, and insignificant investments into gross capital formation, left the people all the more vulnerable to and less prepared for climate change shock that has hit the country in the shape of torrential rains and flash floods.

Copyright Business Recorder, 2022