The currency is down again and the policy rate is revised up. Shamshad Akhtar, the caretaker finance minister, is in full austerity mood. She is doing justice to numbers, without fearing any political ramifications. Meanwhile, the pessimism is all around. The stock market is falling like nine pins. And the fate of the currency is no different.
The impact of recent monetary measures is yet to translate into numbers, for imports based on Pakistan Bureau of Statistics dataset are showing no decline even as exports have dipped a bit. The recent round of currency adjustment and increase in policy rate may take a couple of months to have its impact on the external trade.
After morphing into a full-blown menace in FY18, the current account deficit (CAD) is expected to come down in FY19. Reasons being continued exchange-rate and interest-rate adjustments as well as tapering of the fiscal deficit going forward.
The outgoing government spent like a king in the last two quarters while the economic conditions warranted strong austerity measures. It was an election year after all, so nobody cared about medium- to long-term implications of fiscal deficit slipping by around Rs1 trillion from the targeted number.
Good on the caretakers, who are giving no heed to political implications of austerity and making the necessary adjustments. Meanwhile, political uncertainty and polarization amongst stakeholders are weakening the investor sentiment further.
Having said that, it’s no doomsday yet! The crisis the country is facing in 2018 is of lesser severity than what it was back in 2008. This time, it is primarily the government’s extravagant spending that has created this havoc while the private sector is not in a shambles. In fact, the private sector is cash rich; banks have adequate liquidity; and the consumer demand is on strong footing.
Yes, inflation may resurface and could come close to double-digit by FY19 end. But the economic expansion has created capacity for cash-rich private sector to cater to growing domestic demand.
The looming slowdown for a year or two has an opportunity for the incoming government to focus on bringing competitiveness in the economy. They won’t have to adjust currency as it is being done by the caretakers. Much of what they will need to do includes spending less from the kitty and working on building effective public- private partnership models to utilize space in the private sector.
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