Economic policy needs a hard reset

The present currency crisis in Pakistan is unprecedented. PKR has depreciated against USD from 180 to 305 since March 2022, and now it is a creating a self-feeding bubble. People are losing confidence in PKR, and that is very dangerous. Inflation expectations are getting unanchored, and once it happens, restoring confidence back, and controlling the inflation, will become extremely difficult.

There are examples of Latin American countries where inflation was unanchored in the 1980s, and it peaked at 2,000-3,000 percent in Argentina and Brazil, respectively. These countries had introduced new currencies as hyperinflation eroded the value of existing ones. These countries had external debt repayment and fiscal mismanagement issues, and that had resulted in exchange rate instability and hyperinflation.

The problems of Pakistan are similar in terms of managing debt and extremely ill-managed fiscal house. And lately, inflation is entering dangerous levels. At this point, either the expectation is already unanchored or can happen any time. The time is running out fast; and once things spiral, history suggests, no one can control it.

Being an eternal optimist, this writer still thinks that the situation can be brought under control and the steep currency depreciation and inflation expectations can be managed. However, the economy cannot be handled in isolation. There are challenges on multiple fronts– political, social and economic.

The economic revival plan cannot be run without having a buy-in of all the stakeholders. To implement it, the overall enabling environment is essential, and the political dimension is important in this case. And to address the uncertainty, the business community has been wooing for technocratic setup for a prolonged period.

However, within weeks of caretakers’ arrival, the situation is getting out of hand. Inflated electricity bills are breaking the back of the masses. Many have already exhausted savings at times of falling disposable income. And now the cushion to pay for extraordinary bills is thinning. The currency is in a freefall, and household confidence in the PKR is at a new low.

The titbits coming from caretakers are not very encouraging. The Prime Minister (PM) termed the inflated electricity bills a ‘non-issue’ while the Finance Minister (FM) hinted that it was not the best decision for her to assume the FM’s position. People and markets are losing hope and confidence in the caretaker set-up, so to speak.

And broadly speaking, technocrats have their limitations. One technocrat (who was in the race of one of a key ministries and had remained in a government in the past), lamented in a frank discussion with friends: “…they ask us to come and then they tie our hands and expect us to deliver. Later when we fail, we take the blame and have to face NAB”.

In short, an interim setup is not a permanent solution. Everyone knows it is for limited time and the current setup may not have the capacity to deal with multiple challenges the country is facing. People need clarity and visibility. Otherwise, the confidence will erode further.

Social and political anxiety is building. This needs to be dealt with to bring economic stability. And the way things are today, on multiple fronts, a hard reset is required. A fresh start is warranted. All the stakeholders must forget and forgive and have a fresh start for the sake of the country to not slip into a bottomless pit.

The country does not have more time to waste. We are on the verge of hyperinflation and it’s not easy to undo it if the expectations are unanchored. SBP’s (State Bank of Pakistan’s) monetary policy is not enough to handle it. It’s a crisis of confidence.

And political clarity is warranted to start with rebuilding. Sooner or later, we will reach the same conclusion. But the cost of wasting time will be paid by people, not the ruling elite. This ‘adjustment bureau’ may not work anymore.

Copyright Business Recorder, 2023