The boom and bust cycle
During the boom the economy grows. In 2018, Pakistan’s economy grew by a wholesome 5.8 percent. Businesses were happy and there were jobs for the jobless.
In 2019, GDP grew by a paltry 0.989 percent followed by a growth of 0.5 percent the following year. For Pakistan, that’s the equivalent of a bust. During the bust businesses lose money and people lose their jobs.
The Federal Government jumps in with massive subsidies. Exporters are given cheap electricity worth Rs200 billion, cheap natural gas worth Rs150 billion, tax exemptions of Rs400 billion and cheap loans worth Rs200 billion.
The fertilizer industry gets federal subsidies of Rs150 billion plus provincial subsidies. Consequently, in 2021, GDP growth jumped to 3.9 percent. Growth kicks in-growth based on heavy government subsidies and cheap loans.
Growth kicks in-and imports begin going through the roof. In August 2021, imports grew by 89.9 percent to $6.31 billion from $3.32 billion in August 2020.
Growth kicks in, imports go through the roof, exports go flat and the trade deficit swells. In August 2021, the trade deficit swelled to $4.06 billion from $1.74 billion in August of last year. Growth kicks in, imports go through the roof, exports remain flat, the
trade deficit swells-and the rupee takes a dive. Imagine; since May the rupee has fallen by 12 percent.
When the rupee takes a dive the price of everything imported goes through the roof and that includes petrol, diesel, wheat, sugar, cotton, fertilizer, machinery, iron, steel, tea, chilies, palm oil, paper board and electricity.
Growth kicks in, imports go through the roof, exports remain flat, the trade deficit swells, the rupee takes a dive and inflation kicks in. The State Bank of Pakistan (SBP) comes under pressure to use its reserves and support the rupee. Between June to September, SBP threw $1.2 billion out of its reserves to support the rupee.
The problem is that the SBP does not really have ‘reserves’ as these so-called ‘reserves’ are actually loans taken over the past three years.
IMF loans $7 billion, Saudi loans $2 billion, UAE loans $2 billion, China trade facility $3 billion and commercial bank loans $5.8 billion-for a total of $22.8 billion. Roughly, that’s the equivalent of SBP ‘reserves’.
Yet once again we are up against the same old dilemma-a ‘situation in which a difficult choice has to be made between two or more alternatives, especially ones that are equally undesirable’. Either the rupee will fall or SBP reserves would have to go down-both undesirable.
Central banks can provide temporary relief for the symptoms but cannot cure the disease. The disease here is the widening trade deficit and the symptom is the falling rupee. The SBP can provide relief for the symptom but has no cure for the disease.
Unfortunately, there will be imported inflation, a widening trade deficit, a falling rupee and depleting SBP reserves-and that means back to the IMF. The IMF will clamp down on cheap electricity, cheap natural gas, tax exemptions and cheap loans.
And that surely will strangulate growth. But strangulation of growth especially when the government has gone into the election mode will be suicidal for the PTI government. That’s the next dilemma-dilemma galore, confusion galore.
The month of October is going to be a challenging one. The United States has announced that it will be reassessing its relationship with Pakistan-and will be formulating “what role Washington would want Pakistan to play in the future of Afghanistan.”
FATF plenary meetings will be held from October 17 to October 22. And, the Annual Meetings of the Boards of Governors of the World Bank Group and the IMF are scheduled October 11 to October 20.
A growth fuelled by heavy subsidies is simply not sustainable. A trade deficit financed by debt is not sustainable.
This ‘sequence of reciprocal cause and effect in which two or more elements intensify and aggravate each other, leading inexorably to a worsening of the situation’ needs to be broken. This vicious cycle needs to be broken. This boom and bust needs to be broken.
Fortunately, we have the PTI Manifesto 2018, ‘The Road to Naya Pakistan’. The PTI Manifesto 2018 has the word ‘reform’ written 46 times-’reform the civil service, reform the FBR, reform the police, reforms in governance, reform government procurement, reform the prison system, legislative reforms and reform the foreign service.’
This vicious cycle can be broken. This boom and bust can be broken. PTI Manifesto 2018 has the prescriptions. Turnaround the loss-making State Owned Enterprises (page 30). Put an end to “heavy line losses and power theft (page 31)”.
Reform public processes such as procurement (page 16). Pay-off the massive national debt accumulated over the last decade (page 26). The Manifesto reads: “PTI strongly believes that an ineffective state structure has generated a crisis of governance that has effectively marginalised everyone in the country except a small elite.”
