Is Pakistan moving towards an economic crisis similar to the one seen in 2008? There is some consensus that an external sector-driven crisis — a perpetual periodical feature of the economy — is inevitable but opinions differ about its depth and impact.

Some are appalled by the unprecedented surge in public borrowing, import, trade deficit and balance of payment gap created over the past four years — all recorded at either very high or all-time high levels in 2016-17. And worse still, the trends continue largely unabated.

And in the words of a financial analyst “the real concern is the lack of direction and policymaking on deteriorating external accounts”. The current account deficit swelled to $12.1 billion during fiscal year 2017.

The government sees these macroeconomic indicators as ratios of an expanding GDP and is satisfied that the situation is not alarming.

Some see improvements in macroeconomic indicators, a continuing moderate growth rate, improved business confidence, rising consumer spending, more aggressive investment cycle, China-funded CPEC projects and a changed global economic environment that would soften the shock generated by any severe external sector crisis. They think that it would not be a repeat of the 2008 episode.

Within the domain of diverse independent opinions, there is, however, one common point of agreement: that Pakistan will have to go back to the IMF to seek assistance to shore up the problematic balance of payments position. However, Prime Minister Abbasi says Pakistan will not return to the IMF.

His statement does not seem to be backed by visible ground realities and the latest concern is that accessing the Fund may not be easy for Pakistan owing to its current phase of strained relations with Washington.

Moreover, in the current fragile global recovery, the Fund cannot stomach a default risk; and for Pakistan, some Chinese help cannot to be ruled out in times of crisis.

Referring to striking similarities seen by some fund managers between the FY08 economic conditions and those that exist today, an analyst at Elixir Securities Pakistan, Hamad Aslam, says: “Such comparisons are unwarranted as the situation now is far more manageable”, given “the improvement in most of the macroeconomic indicators.”

Economic growth has edged up to 5.3 per cent in FY2016-17 to a 10-year high, adding $25.2bn to the GDP.

The growth — targeted at 5.5-5.8pc for FY2018 — is unlikely to be derailed by a domestic shock because CPEC investment is largely driven by China. Similarly, the current account deficit is expected to be around 6pc for this fiscal year versus 8pc in 2008.

No doubt the balance of payments crisis was an important reason for the 2008 meltdown but it was coupled with other structural weaknesses that wiped out the entire GDP growth the following year.

The situation was marked by the global commodity price crash which led to massive losses in agriculture and trading sectors. The Great Recession following the international financial crisis had a serious impact on the country’s external sector.

At the same time, the securities house study titled ‘Crisis is a Terrible Thing to Waste’ notes that the economy was massively leveraged (compared to historical standards) in 2008 as the advances to deposit ratio in the banking sector was 77pc (close to regulatory cap) inducing the banks to choke their credit lines and decline further loans to businesses facing a sudden shock. This led to manifold impact on the bottom lines.

On the other hand, initial results show that revenues of listed companies grew by 23pc and corporations profitability by 15pc over 12 months ending March 2017. The advances to GDP and advances to deposit ratios were at multi-year lows at 19pc and 52pc in FY 2017 versus 28pc and 77pc respectively for 2008.

In the midst of this worsening situation in 2008, the study points out, came the unwarranted hike in SBP’s discount rate — an all time high of 15pc — to tame inflation (which shot up to a unprecedented 24pc) following withdrawal of subsidies. All this resulted in reduced domestic demand. This compares with CPI inflation falling from 4.2pc in April 2016 to 2.9pc in July 2017.

Inflation is subdued in an expansionary phase of the economy. And stable interest and exchange rates are being kept stable to spur investment and production.

Here it is pertinent to note that the IMF stability programme, designed for fire fighting, focuses on macroeconomic stability at the cost of GDP growth.

Apparently much of the current effort to improve the economy is going into raising national productivity through upgrade in infrastructure, better energy supplies, and import of capital goods and better utilisation of installed industrial capacity.

The efficiency level of the economy is also improving with wider use of IT and ICT. The federal finance secretary says ‘healthy imports ‘will help boost production and exports.

With finance-led globalisation slowing down, the domestic economy of Pakistan like many other countries, is being rebalanced to acquire more muscle but not without facing inherited hiccups.

Pakistan has still a huge under-utilised industrial capacity and farm productivity is at a dismally low level. The underlying problem of perpetually distressed external sector is that the domestic economy is not so competitive internationally. That requires more productive use of capital, labour, natural resource and latest technologies.

Improving the fundamentals of the national economy would impart strength to the external sector and not periodical dozes of foreign credits and short-term stability programmes.

A robust, self-reliant, national economy will have better capacity to integrate into the global economy on a more durable basis by significantly reducing the frequency of domestic cyclic and systemic crises.

Till then crises will recur with lower or greater intensity.

jawaidbokhari2016@gmail.com

Published in Dawn, The Business and Finance Weekly, September 18th, 2017

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