Economic anxiety

Updated February 26, 2020

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THE government is now showing visible signs of aggravated anxiety at the economic situation, with daily meetings between the prime minister and his cabinet and demands for freezing power and gas tariffs for the remaining months of the fiscal year.

Read: Pakistan has come out of economic crisis: Imran

In addition, strenuous attention is also being paid to food price hikes, with law-enforcement action ordered against alleged ‘hoarders’.

It is good to see this government finally stepping up to the responsibilities of rule, but it is crucial to acknowledge what the finance ministry itself said a few days ago.

The path of macroeconomic adjustment is rarely easy, but it must be walked in the absence of credible alternatives. The ministry warned that “it is imperative to continue with the adjustment” in its Mid Year Budget Review report released on Feb 20, and pointed to “lingering vulnerabilities in the economy and the chronic nature of structural challenges” that remain.

The words are strong and they point in the opposite direction from the one the government seems to be taking these days.

There should be no doubt that the adjustment has to continue.

The economy has shown some encouraging signs, or perhaps more specifically it should be pointed out that government finances and the foreign exchange reserves situation have shown improvement.

But the wider economy continues to groan under the burden of rising inflation and high interest rates, with the populace weighed down by greater unemployment as well.

The impact on the poor, as well as the lower middle classes, is undoubtedly stupendous, and elected governments cannot withstand the pressures that usually accompany such developments.

Finding ways to mitigate this impact, to target the mitigation efforts where they are most needed, is indeed a crucial priority. But abandoning the adjustment at this stage, when the first fruits of the sacrifices made along the way in the form of rising reserves and a meagre but undeniable surplus in the primary balance have begun to emerge, would be near suicidal.

With the buffers built thus far, the government may be able to bring about a fleeting moment of respite. But it will pass very soon and an even more painful adjustment will need to be undertaken afterwards to compensate for the folly.

Besides the mitigation efforts, the prime minister would be well advised to focus on the second part of the two warnings sounded by the finance ministry: the structural reforms.

This is key.

The moment opened up by the return of macroeconomic stability would be best utilised if the foundations of future growth were to be laid during this time.

Simply revving the engines of growth at this point, without any reform to address the underlying dysfunctions of the economy, will cause the deficits that necessitated the whole exercise to re-emerge.

Published in Dawn, February 26th, 2020