THE chief justice has been restored. This removes a major source of uncertainty that had plagued the economy since November 2007.

In an economy largely reliant on private decisions for investment and growth, uncertainty of any kind proves to be detrimental. Especially, uncertainty related to the recourse to the due process of law, accompanied by public unrest and political protest. Policymakers previously consumed by judicial and related constitutional issues, now have the opportunity to think hard about economic restoration.

Inflation, the economic barometer of uncertainty, stood at 8.7 per cent during that fateful November of 2007. Thus, the winter of our discontent had begun well before the global financial meltdown. The rate of inflation has been a cause for concern since and peaked to a record-breaking 25 per cent in October 2008. True, there were also the oil and commodity price shocks. Even if these shocks were to be ignored, which the concept of core inflation is designed to do, the rate of inflation skyrocketed from 6.9 per cent in November 2007 to 18.3 per cent in October 2008.

With no friend of Pakistan extending a helping hand, November 2008 witnessed the economic managers knocking at the door of the IMF yet again. Despite the draconian squeeze and the monetary tightening that followed, the economy has been failing to regain its fundamentals and to lay down grounds for hope.

The macroeconomic framework of the Annual Plan 2008-09 had fixed a GDP growth target of 5.5 per cent, less than the achievement of 5.8 per cent in the previous year. During the initial negotiations with the IMF, the government lowered its sights to 4.5 per cent, although the IMF forecast was 3.5 per cent. In the recent negotiations, both agree on 2.5 per cent. However, we would be lucky if the current year’s growth rate exceeds the population growth.

Here are the indications pointing towards a negative GDP growth per capita for the first time after the politically volatile decade of the 1950s. In the first seven months of the current year, the output of large-scale manufacturing has shrunk by 5.4 per cent. In January the growth slumped to as much as nine per cent. Out of the principal crops, sugarcane output was way behind target, and wheat output, despite area expansion in response to the rise in support price, is likely to suffer from the problems faced in the access and quality of inputs. Exports in the month of February declined by as much as 17.7 per cent.

As the global financial crisis has begun to transmit its influence to the real sector, the world economy will shrink rather than expand after a very long time. Again, for the first time in many decades, world trade, known as the engine of growth, is also shrinking rather than expanding. While the financial sector of Pakistan was not seriously affected by the world crisis, more because of its adherence to tradition rather than the influence of the much-touted reform, the real-sector effects are likely to be much more serious.

While falling world demand is already affecting exports, the mass unemployment in donor countries is telling adversely on their ability to provide foreign assistance. The signals emanating from Islamabad that Pakistan may be approaching the IMF for another loan have something to do with a pessimistic assessment of what the Friends of Pakistan might offer in Tokyo next month.

Economic restoration the world over has involved a rediscovery of state assistance and public investment funded out of borrowing and resort even to the printing press to inject liquidity. But these countries have unusually low inflation and therefore interest rates.

The situation in Pakistan is the exact opposite. Inflation, headline as well as core, is still very high. Following the reversal of energy and commodity price shocks, headline inflation had started to ease somewhat after a peak of 25 per cent in October 2008: it stood at 24.7 per cent, 23.3 per cent and 20.5 per cent respectively in the following three months. However, with the announcement of the long march, headline inflation began to rise again, and was recorded at 21 per cent in February 2009.

Core inflation, the rate to be watched in the context of the interest rate, has proved to be more stubborn. It was 18.9 and 18.8 per cent in November and December 2008 respectively. Then it was stuck at 18.9 per cent in January and February of 2009. Monetary tightening seems to have done nothing to change this trajectory. While higher interest rates deter private investment, a high inflation rate makes higher public investment more inflammable.

Uncertainty and inflation feed on each other. Judicial restoration should help economic restoration by boosting confidence and containing inflationary expectations.

The writer is a former chief economist of the Planning Commission.