The downside of having a stability programme

Updated August 19, 2019


The economy seems to be gaining some traction. The full impact of stabilisation policies will not be known for the next six to 12 months. But the early signs show that the government has so far been successful in stemming further rot.

Tax revenues are going up and the current account deficit has significantly come down on the back of the steep currency depreciation and reduced imports. The government appears to be in control, at least for now, as its fiscal position improves and the haemorrhage of foreign currency reserves stops.

These improvements have forced analysts to revise their inflation and monetary tightening forecasts. Many analysts now expect headline inflation to average around 11-12 per cent on decreasing global oil and commodity prices against the budgetary projection of 13pc for 2019-20. This is in line with the latest forecast made by the central bank in the last monetary policy statement. It should preclude the need for a further increase in the central bank’s policy rate which, some would insist, has already peaked at 13.25pc in spite of market expectations of another hike next month.

Pakistan cannot afford a protracted economic slowdown. Subdued growth could throw a spanner in the government’s revenue-enhancing works

The monetary policy statement had said that an unanticipated increase in inflation may lead to modest tightening, and weaker domestic demand and inflation projections could pave the ground for easing monetary conditions as the “adjustments related to the interest rates and the exchange rate from previously accumulated imbalances has taken place”. But few analysts believe the central bank will go for monetary easing because of its external account considerations in the near term. The central bank under its new governor, Dr Reza Baqir, is focusing only on taming inflation and rebuilding reserves.

On the contrary, it can further raise the policy rate in case the upcoming rebasing of the Consumer Price Index (CPI) pushes up the inflation number owing to changes in the weight of the items in the CPI basket while completely disregarding the rapid economic slowdown.

Last week, Dr Baqir defended the decisions taken by the government and the central bank for reviving the economy. He indicated that the central bank was unlikely to change its monetary policy. “We have turned in the right direction and if we continue our journey with consistency in the direction we have taken we will definitely achieve progress and prosperity.”

Conceding that the country is passing through a tough situation and the economy has weakened, he said: “There is also inflation and unemployment. People are uncertain. But today I can say with certainty that these conditions are changing and that they are improving. Consistency in our policies is our biggest challenge. If there is continuity in policies, I have no doubt that our future is bright.”

Earlier, the central bank had forecast the economy would grow by around 3.5pc against the budgeted target of 2.4pc “conditional upon latest available information”.

“While current high-frequency indicators point to a slowing in economic activity, this is expected to turn around in the course of the year on the back of improved market sentiments in the context of (the) IMF supported programme, a rebound in the agriculture sector and the gradual impact of government incentives for export-oriented industries,” read the last monetary policy statement.

However, the cautious optimism of the central bank and its governor has failed to cheer the markets or remove uncertainty. Business sentiments seem to have hit the rock bottom. So is the case with consumer confidence. The stock market is declining with the KSE-100 index falling below the 29,000 level on Friday. Large-scale industries, like automotive, cement and construction sectors, are facing losses. Retailers are reporting a massive drop in their sales.

Factories are implementing production cuts and laying off workers to save on costs. Exports remain subdued on falling unit prices and exporters have shelved their expansion plans because of rising costs owing to massive currency depreciation and high credit prices.

The increase in exports in the near-to-medium term will depend on the growth rate of Pakistan’s trading partners, progress in alleviating domestic structural impediments and investment in capacity expansion. The low-income and middle-class households are worst affected by the slowdown with their majority struggling to survive as their purchasing power is substantially hit.

True, it will be a folly to change the policy direction on the early signs of economic stability. Yet the markets need assurances to regain their confidence. The government needs to attenuate the pain being caused by a tough business environment, remove structural impediments, increase the ease of doing business and consider giving regulatory and other non-fiscal incentives for fresh domestic investment in export-oriented and import-substitution industries. It also needs to stop the accountability watchdog, the National Accountability Bureau (NAB), from harassing businesses to bridge the widening trust gap between the government and businesspeople.

Pakistan cannot afford a protracted economic slowdown. Subdued growth could throw a spanner in the government’s revenue-enhancing works. Likewise, the macroeconomic stability that it hopes to achieve under the IMF’s programme will not be sustainable unless it can increase domestic productivity to boost exports and cut imports.

While it implements stabilisation policies, the government should take immediate action to restore consumer and business confidence. It must act without further delay because time is fast running out.

Published in Dawn, The Business and Finance Weekly, August 19th, 2019