Beyond deficits

October 15, 2019

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ONLY a day after the financial adviser to the prime minister, Hafeez Shaikh, announced that both the critical deficits — fiscal and external — that have plagued the economy — are under “complete control”, the World Bank reminded us that far more remains to be done. In a new report in which the bank takes a deep look at growth, its risks and drivers, in the greater South Asian region, the picture that emerges is a bleak one. The entire region is plagued by a grinding slowdown, and industrial activity is actually contracting in most countries. Exports are showing a mixed performance, with some countries such as Bangladesh continuing to power ahead, albeit on the back of an almost razor-thin competitive advantage in ready-made garments alone, while India and Pakistan are struggling. For the first time in many years, South Asia is no longer the world’s most dynamic region, mainly because of the slowdown in India.

But the bank does point out the “idiosyncrasies” in the regional dynamic, those elements that are unique to each country, and in this department, Pakistan continues to face an uncertain future. Yes, the current account deficit has shrunk, as Mr Shaikh proudly underscored during his weekend press conference, and, yes, the fiscal balance is improving. But the cuts in public spending are key drivers of a massive, across-the-board slowdown in the economy, and this slowdown in turn is compressing demand. This is far from a policy triumph. It only means that the symptoms have been addressed.

Once the phase of stabilisation ends, the real policy challenge will remain, ie how to get growth started again. The bank points out that this cannot happen in any sustainable way without meaningful improvement in competitiveness and deep structural reform. If the growth engine of the economy were to be primed once again without this reform, the deficits would simply reappear and we would be back to square one, as we have already been so many times. So it is worth remembering that this is not the first time we have seen the fiscal and external deficits contracting like this. Each time this has happened in the past, those in power simply squandered the policy space earned through so much toil and tears by resorting to the same old formula of low interest rates, high public spending and an artificially fixed exchange rate to give us one quick growth spurt. Somebody with Mr Shaikh’s background, and level of understanding, should not need to be reminded that the real challenge has yet to begin. The World Bank report says that in Pakistan “measures to restore macroeconomic stability weigh heavily on growth”. At the same time, the burden of the past will weigh heavily when the time comes to restore growth. That is when the financial team’s mettle will really be tested.

Published in Dawn, October 15th, 2019