LAHORE: In terms of economic performance, fiscal year 2023 has been one the worst in Pakistan’s history. In FY2023, economic growth declined to 0.3 percent, one of the lowest in our history, and average headline inflation soared to 29.2 percent, probably the highest ever.
This was according to the paper The Role of Monetary Policy in the Current Environment: Myths, Criticisms and Reflections presented by Dr Naved Hamid from Lahore School of Economics and Murtaza Syed from Asian Infrastructure Investment Bank at the Seventeenth Annual Conference on the Management of the Pakistan Economy organised by Lahore School of Economics.
The Rector, Dr Shahid Amjad Chaudhry, opened the conference, by highlighting key policy messages that emerged from the 17 papers being presented in the conference.
According to the paper during FY2023, to fight this record inflation, the SBP’s Monetary Policy Committee (MPC) increased the policy rate to 22 percent and has maintained it at that level for the last nine months. This policy has come in for considerable criticism in the press and by some economists on the TV and in the social media.
The findings of the review of the paper provide guidance for appropriate monetary policy setting in the current economic environment. The paper also gave a brief over view of the recent economic developments in the country.
As per the findings of the paper the real interest rate become positive, it theoretically provides room for the central bank to start cutting the policy rate over time. However, since inflation is still high (20.4% in March 2024) and inflation expectations remain unanchored it is necessary to reduce the policy rate cautiously.
The scope to cut is also contingent on fiscal policy remaining prudent, the path of administered prices and any tax increases. Finally, commodity prices also need to be carefully watched, especially given the ongoing events in the Middle East.
It is also noted that, since Pakistan’s capability in terms of the growth rate at which the economy hits the current account deficit constraint seems to have declined to around 3 percent, and until structural reforms are implemented and maximum growth capability is increased, the central bank has to be even more careful once the growth rate gets into the 2-3 percent range. At this point, besides inflation, current account sustainability and the exchange rate stability have to be key factors in its decisions regarding the monetary policy stance.
Dr Moazam Mahmood and Shamyla Chaudry from Lahore School of Economics in their paper predicted that Pakistan’s economy may have lost its high growth rate of 6%, driven by investment. Nevertheless, Pakistan’s growth has plodded at 4%, switching to consumption as its driver of growth.
Earlier 6% growth was driven by investment. Latter 4% growth has been driven by consumption. Therefore, the days of Investment led growth are gone, perhaps irretrievably. We need Consumption led growth. The consumption would be very high, for the consumption multiplier to work but we persist in the misconception of needing high investment. They proposed a policy which will give a give a market mechanism to reduce these outflows of domestic savings.
Dr Ayesha Afzal and Ramsha Noor from Lahore School of Economics in their paper Transfer Programs and the BISP in Pakistan provided a detailed analysis of Cash Transfers as a tool for poverty alleviation in Pakistan. Typically, cash transfers have two purposes: (a) poverty alleviation through the cash transfer in the short run and (b) accumulation of long-term human capital through health care and education in the long run.
According to the paper the role of financial inclusion, especially for women and the modes of payment distribution are a crucial element in the success of the cash transfer program in Pakistan. The use of smartphones and digital biometric identification can have a transformative effect and increase the amount of financial resources available while also drawing attention to potential risks related to data protection and other abuses.
The paper also attempts to forecast the impact of a continued UCT programme on the poverty levels in the country for 2024-2028, based on the forecasted values of macro-economic indicators including inflation rate, unemployment, current account balance, economic growth and investments as given by the IMF. The aim is to suggest appropriate policy measures focusing on broadening the UCT programme under BISP while reducing the inherent inefficiencies.
Dr Azam Chaudhry, Dr Moazam Mahmood, Seemab Sajid and Amna Noor Fatima from Lahore School of Economics in their paper State of Economy and Welfare highlights that the
Pakistani economy will grow at a rate of 2.3% in FY 2024 and showed that a combination of this low growth and high inflation will significantly increase poverty this year and in the coming years.
As per the paper half of the current inflation rate of 23%, is estimated to be caused by the impact of depreciation of the exchange rate over this period, of 12%. While another 5% is estimated to be caused by increases in commodity prices, especially for energy. Energy prices have surged by a weighted average of 10% over this period. The larger share in this surge being caused by GOP’s increased taxation on energy.
Dr Rabia Ikram and Muzzna Maqsood from Lahore School of Economics in their paper
Reallocation of Investment from the Public to the Private Sector highlights that Pakistan’s economy has experienced a significant shift in growth patterns, with an average GDP growth decline of 1.84 percentage points since the 1990s. This decline in growth aligns with a drop in investment growth, which decreased by an average of 3.11 percentage points (Ikram and Moazam, 2022).
They also highlighted that a key factor in this decline is the reduction in public investment, particularly in the electricity sector. Policy shifts during the 1990s led to the withdrawal of public investment from the electricity sector, as part of a structural adjustment program that emphasized privatization. This transition introduced private sector involvement in energy through the establishment of 18 independent power plants (IPPs), based on the belief that private entities would operate more efficiently.
Dr Rashid Amjad and Almazia Shahzad from Lahore School of Economics in their paper reigniting sustainable and inclusive growth in Pakistan talks extensively about the key factors responsible for recurring stop-go economic cycles in Pakistan. The second part, concentrates on macroeconomic management to move towards sustained growth and suggests reversal of role between federal and provincial governments in achieving this goal.
This paper proposed that a potential solution to reducing the fiscal deficit and addressing the economic challenges, lies in reversing the roles of the federal and the provincial governments. Considering the 7th NFC award and 18th Constitutional Amendments, it suggests that the federal government be entrusted with the responsibility of the ensuring macroeconomic stability, attracting foreign private investment and implementing the reform agenda, while provinces must play a pivotal role in generating growth, creating job and improving the quality of health and education service.
Copyright Business Recorder, 2024