TWO very different narratives regarding the state of the economy are currently in the field. The government as well as the central bank are emphasising that the external account has stabilised, the economic crisis has dissipated and the economy has ‘turned the corner’. Most independent commentators, media and the public are complaining about high inflation, businesses going under and rising unemployment. Both these narratives are not completely wrong (though one is partially correct and the other entirely so).

How does one reconcile these two apparently conflicting views? I had presented a framework to do so in my previous article in this newspaper [State of the economy]. The ‘shock wave’ from the balance-of-payments crisis that Pakistan experienced last year first moved from the external account to the asset markets (currency, stocks, real estate), and then, within a few months, got transmitted to the real sector of the economy — businesses, factories, retailers etc. Its effects are now moving to the banking system, as anticipated.

When stabilisation begins to take place, the process works in the same order. The external account stabilises first, with foreign exchange reserves and the currency stabilising, followed quickly by the asset markets. The real sector, however, takes a longer while to recover. How long the recovery takes depends on the severity of the crisis and the corresponding ‘dosage’ of the policy measures adopted.

In short, the economy consists of many moving parts — and the government is talking about one of them, ie the external account. Everyone else, however, is exposed more directly to how private-sector businesses and individuals are faring on a daily basis, and how each is trying to cope with high inflation, loss of income, lower purchasing power and joblessness. Hence, there is an obvious disconnect as the government and the people are looking at different parts of the picture.

Despite the fiscal straitjacket there are potential avenues to growth.

The silver lining is that stabilisation of the external account is a necessary condition for the economy to turn the corner from the crisis, and the more it takes hold, the closer Pakistan will be to seeing economic activity bounce back. However, stabilisation on its own is not a sufficient condition for growth.

Reviving economic growth will require robust policy action in the area of structural reform. Indeed, many of these reforms on the taxation side or documentation (such as the anti-smuggling drive), are anti-growth in the short to medium term. However, the government should accept this trade-off.

Growth for its own sake should not be the policy objective. This crisis affords an opportunity to policymakers to reset not just the growth path but also the quality of growth. Growth without reforms will lead to a repeat of the boom-bust, debt-financed unstable cycles of the past. What policymakers need to aim for is economic growth that is sustainable, inclusive and jobs-creating — one that lasts uninterrupted at seven per cent plus for two decades or more.

This goal is not unattainable. While the reforms undertaken so far are clearly insufficient, developments and policy actions in the recent past have opened up growth opportunities for Pakistan that have not been available for decades. The first and foremost of these is the adjustment of the exchange rate. The removal of the almost perennial over­valuation of the rupee has lifted a millstone from the country’s export potential — as well as opened up opportunities for import-substituting industries. In a country that imports virtually everything from pins to planes, the potential for import substitution cannot be overstated. (It may not be planes, but there is plenty in between to provide tremendous business opportunities going forward).

The performance of exports in terms of quantities is testimony that the adjustment of the rupee is already bearing fruit. There is more proof. A leading fast-moving consumer goods company has not just begun its first exports from Pakistan to regional countries — but has exported to the US market too post-devaluation. These are its first-ever exports from the country after decades of operations in Pakistan.

The exchange rate adjustment needs to be supplemented by a host of growth-supporting measures in the short run that primarily target the export sector. While policy latitude is limited under the IMF programme, there is quite a lot the government can still do, provided the finance ministry chooses to be innovative and strategic in its approach. It should reinstate the export sector’s energy subsidies and ensure pending tax refunds are paid back as agreed with an improvement in the sector’s liquidity.

In addition, the FBR should realise that direct exporters are one final part of a supply chain. Causing disruption to any part of the export supply chain, much of which is composed of small and medium enterprises will hit final exporters too. The thinking in policy circles, including at the Prime Minister’s Office, continues to mistakenly view SMEs as stand-alone businesses operating in a vacuum, when they are largely part of a value chain. If the larger businesses in autos, textiles, consumer goods, steel, sports goods etc. are distressed, that distress is transmitted throughout the chain.

One measure that can alleviate the rising distress of SMEs is the possibility of introducing a line of subsidised long-term credit by the central bank where higher-interest rate financing for working capital can be ‘swapped’, much like the long-term financing facility introduced by the State Bank in the mid-2000s. At the same time, the bank needs to reconsider its excessively high real interest target which is imposing a heavy cost on government and businesses.

While the second phase of CPEC is a potential growth driver, there is a need to dissipate the lingering uncertainty with regard to the vulnerability of the external account in the medium term. This is where the IMF can step up with a more positive role. It needs to augment its programme and show more ‘skin in the game’. It also needs to move the goal post for its reviews from narrow, quantitative targets to more structural conditionality.

Finally, the government should suspend its anti-encroachment drive against markets and businesses across the country and provide relief to small business owners.

The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, October 25th, 2019