A fluctuating graph

Published January 1, 2021
WITH lockdowns dictating life, the daily-wagers particularly took a hit alongside the national economy.
WITH lockdowns dictating life, the daily-wagers particularly took a hit alongside the national economy.

THE year 2020 began and ended with the government talking about economic recovery, but along the way it faced challenges of an unprecedented nature. Past crises have almost always involved a sudden drain of the country’s foreign exchange reserves, prompting an emergency appeal to the IMF, followed by a gruelling period of macroeconomic adjustment that forces the government to sharply curb expenditures, raise taxes, hike interest rates and devalue the currency. The resultant economic pain almost always drains the political goodwill of the government which is forced to administer this medicine, and very soon the economic crisis gives way to increasing political challenges for the government.

The year 2020 was different. A crisis came in the form of a virus, forcing the government’s hand to impose a lockdown to mitigate the spread of the infection. The result was a near universal closure of industry and markets – both financial and retail. Ever since it emerged from the industrial revolution of the late 18th century, industrial civilization had seen nothing like this universal shut down that happened around the globe.

In Pakistan the lockdown happened to come at a time when the economy was emerging from a period of painful adjustment. Reserves had been rebuilt, the external deficits had been brought under control, the fiscal account saw a primary surplus for the first time in many years, and the government was eager to start using its newfound buffers to promote growth.

The economic crisis of 2020, in that sense, was different from all the other crises the country had seen in its 70-year history because it happened in the middle of an improving situation. The ongoing IMF programme was suspended almost immediately, and the fund extended a $1.4bn emergency credit line to help the country face the challenges posed by the virus.

Coming in the middle of an improving situation, the crisis of 2020 was different from anything seen in national history.

The lockdowns exacted a severe toll. Growth plummeted to negative for the first time in many decades, revenue collection and exports plunged as factories and foreign markets all closed down. But luckily for the government, the preceding months of painful macroeconomic adjustment, under the auspices of an IMF programme, had created the buffers with which to administer a historic stimulus to the economy.

For the first time in its history Pakistan undertook pro-growth policies – also known as an economic stimulus – to reckon with the effects of an economic crisis. All other crises were managed with policies that stifle growth, with the aim of extinguishing the deficits that have grown to unmanageable proportions.

Alongside the lockdowns, the prime minister announced a package of stimulus measures the likes of which had never been seen in the country’s history. Totalling Rs1.24 trillion, it dwarfed all other incentive schemes that had ever been announced in the past. Coupled with this, the State Bank sharply began reducing interest rates and embarked on a debt deferment and restructuring programme for the private sector that eventually saw a total of Rs872bn in private loans either deferred or restructured. Coupled with this was also a series of loans extended to support enterprises in paying their wage bills as well as subsidised credit for investment. Between them, a total of Rs460bn was extended in credit relief for the private sector.

This was an unprecedented stimulus package, between the government and the State Bank it totalled almost Rs2.5 trillion, and that is not counting the benefits from the 6.25 percentage point reduction in interest rates that probably did more to spur private activity than any of the other stimulus measures.

It is hard to tell how far the stimulus worked. Growth returned by the end of the summer as all indicators of economic activity began showing an uptick, but the fact that the infection proved far less lethal in South Asia compared to Europe and North America allowed the government to lift the lockdowns far sooner than originally expected.

With the stimulus measures in place, reduced interest rates and the gradual opening of markets in Pakistan’s export destinations, growth slowly began to return, though, at a projected 2pc, it is still far below the pace necessary to absorb fresh entrants to the labour force.

By October, the current account surplus reached $1.2bn (compared to a $1.4bn deficit in the preceding year), and the rupee appreciated by more than 3pc against the dollar, and the primary balance again posted a surplus in the opening months of the new fiscal year, from July to September. These were signs that the economy had weathered the historic challenge posed by the lockdowns.

No sooner had the lockdowns receded, however, than spiralling food inflation appeared once again. Last year it had climbed rapidly in the same months, so this year when it climbed again compared to last year’s price level, it was a sign of an intensifying price spiral. By November of last year, for example, food inflation had soared to 16pc in urban areas and 19pc in rural. This was a very high base to begin with. So when it soared once again in the winter months of this year, touching 13pc in urban areas and 16pc in rural, it meant last year’s price surge was being superseded this year.

The spiral sent the government into a panic since it threatened to overshadow the story of economic recovery that they were extolling on all platforms. Hurried imports of wheat and sugar were arranged to bring the trend down, and, by December, indications were mounting that the price level was stabilising.

As the year came to a close, the government was back to facing the same challenge it opened the year with: how to move from adjustment to growth. Talks have begun with the IMF for revival of the programme, and the fate of many of the lingering stimulus measures now hangs in the balance.

In 2021, the government will have to face the question it was supposed to have faced in 2020: how does it plan to walk the line set by the IMF programme and continue with its pro-growth policies at the same time?


Published in Dawn on January 1, 2020, as part of a special supplement – YEARENDER 2020

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