Economy In Perspective: Too Much Too Fast?

THE LNG supply issue was clearly a case of the government doing too little too slow and too late through the year.
THE LNG supply issue was clearly a case of the government doing too little too slow and too late through the year.

THE main economic storyline in 2021 was ‘growth’. Growth happened, but the news otherwise was gloomy as people groaned under the back-breaking inflation produced by soaring global prices and all the money pumped into the system through unprecedented stimulus packages. The first political manifestation of the public discontent came in the debacle the ruling party had to suffer in the first phase of local government elections in KP, the PTI’s stronghold.

The year began with the government bragging about a quicker economic recovery from the Covid shock, around mid-year it moving away from macroeconomic adjustments on to the growth path, and by yearend, it was back to stabilisation. “The year 2021 was a roller coaster year for Pakistan’s economy,” says Mohammad Sohail, CEO of Topline Securities. “We saw the boom-bust cycle of our economy squeezed from 4-5 years to just one year,” he asserts, adding that the government’s pursuit of rapid growth was a mistake.

The economy was on its way to grow by 3.9pc after having contracted by 0.47pc the preceding year due to the Covid outbreak. Generous financial support from the multilaterals to cope with the adverse impact of the pandemic, and commercial borrowings helped Islamabad rebuild its dollar reserves. The external deficit appeared to be in control with the current account, supported by an unprecedented surge in remittances, showing a surplus in many years.

By the time the year progressed to the halfway mark, the prime minister had already made his preference for putting the economy on a faster route to growth. The first indication of the policy shift came when he finance minister Hafeez Sheikh, who had presided over painful macroeconomic adjustments under the $6bn funding programme of the International Monetary Fund (IMF) since 2019, was replaced with banker Shaukat Tarin, a known critic of the stabilisation policies.

The boom-bust economic cycle generally takes 4-5 years to complete, but in 2021 it all happened within a year. The consequences had to be serious, and they were.

The first thing Tarin did after assuming the charge at the Q Bloc was to put on hold the new agreement with the IMF. The suspension of the funding programme during the early months of the pandemic had allowed both the government and the central bank enough space to give unprecedented stimulus to the corporate sector. The size of the government package was Rs1.2tn, and that of the central bank, over Rs2tn. Additionally, the central bank also aggressively slashed the cost of money by 6.25pc, from 13.25pc to 7pc, to spur private investments.

Tarin, who, like Sheikh, had presided over the national economy under PPP dispensation, was confident that he could build up on the post-Covid recovery during FY21 to grow the economy at a much faster pace ahead of the 2023 elections. Ignoring the IMF demands of austerity, he refused to increase taxes and electricity prices, saying these actions would stifle growth.

Alternatively, his plan was to boost economic growth to increase tax revenues and cut power-sector debt worth over Rs2.3tn as he went full speed for a budget that sought massive public sector development investments of Rs900bn along with generous tax incentives for the corporate sector to push the GDP growth. The federal budget released in June also announced a large, multi-year subsidised loan package to finance agriculture, housing and small businesses to boost productivity, create jobs and alleviate poverty in the country as part of a ‘bottom-up’ strategy.

He was confident that he could win over the IMF and convert it to his side once the results of the pro-growth strategy started to trickle in by the time the lender took up the next review of the funding programme. Apparently, the government was also hoping that the return of the Taliban to power in Afghanistan would increase Pakistan’s leverage with the West, especially with the United States, that should help Pakistan secure a better deal from the IMF. Tarin first alluded to this in an interview with a British newspaper just before the budget.

Growth kicked in on the back of pent-up demand and, perhaps, at a much faster pace than was anticipated by anyone, including the policy-makers. Along the way, the economy was faced with the usual challenges: the country’s dollar reserves started to drain fast on demand growth and the home currency began to weaken. What made things worse was global inflation, particularly in terms of energy and food prices.

Naved Hamid, a professor of economics at the Lahore School of Economics, argues that Pakistan’s economy is structured in such a way that “we just cannot sustain growth of about 4-5pc without hitting balance-of-payments troubles”. Yet he believes that the economic performance has been pretty good except in not being able to bring inflation under control “given the fact that 2021 was a year of uncertainty for the entire world because of the pandemic”.

He doesn’t agree with the view that it was a mistake to pursue growth. “In hindsight, I would say that the direction was right; but the focus of such policies as pushing automobile sales through incentives to get growth was misplaced. The government should have been careful in controlling the uncertainty that followed its fiscal and monetary policies.”

Although the imports and the current account deficit had started to grow in a big way back in June, the government and the central bank called it a one-off phenomenon and continued to blame global commodity prices for the rising domestic inflation. It was only in September that the State Bank of Pakistan (SBP) in its monetary policy statement said economic growth had “exceeded expectations”, and it subsequently bumped the key policy rate by 25bps to 7.25pc for the first time in 15 months to moderate the escalating demand, slow down import growth and contain price inflation. That didn’t work though.

The loan-based foreign exchange buffer kept depleting, with the current account deficit expanding to over $7bn, or 5.3pc of the size of the economy, on sharp surge in imports and global commodity price boom between July and November. This compares with the early SBP current account deficit projections of 2-3pc of GDP, and the revised forecast of 4pc for the entire FY22. Ever since the SBP has drastically tapered its monetary stimulus by raising the policy rate by another 250bps, to 9.75pc, and implementing other measures to curb growth in money supply and rapid expansion in consumer lending by the banks.

The Afghan situation also didn’t turn out to be of any help to Islamabad either. Rather, it has put an additional burden on the frail foreign exchange stocks, forcing the SBP to place new controls on the purchase of foreign currency from the open market. “The assumption that Pakistan would be able to win concessions from the IMF was misplaced because of the cold that marked Islamabad’s relations with Washington. The script has gone awry,” asserts Mohammad Sohail.

In the emerging situation, it was natural that the policy focus shifted from growth to the management of the evolving external sector crisis as Tarin returned to the IMF in October for the resumption of its programme. The lender refused to budge, demanding five ‘prior actions’ pertaining to increase in electricity prices and petroleum levy, monetary tightening, elimination of tax exemptions, reduction in the current and development expenditure, and State Bank autonomy.

Even though the government implemented most of the conditions, the revival of the funding any time soon remained uncertain till the very end, owing to delays in matters related to SBP autonomy and fiscal adjustments to the tune of Rs550bn. Some sections of the ruling party and its allies were also reluctant to support new taxation and cuts in view of the upcoming local elections in Punjab after witnessing the voters’ mood in KP.

Besides, the establishment was said to have ‘reservations over the proposed changes in the SBP law’ that will give unfettered powers to the central bank. Little wonder, then, that the market remained in a flux as it continued to wait for the outcome of the IMF review. Even the Saudi assistance of $4.2bn in the shape of cash deposit and deferred oil payments only had a transient feel-good impact on the market players.

Going forward, getting back into the IMF programme would not be the only challenge for the government. Its troubles on account of the China-Pakistan Economic Corridor (CPEC) and the Financial Action Task Force (FATF) would keep thing hectic.

“For an overwhelmed government, the task of easing Pakistan’s economic troubles will not be easy,” says Fahad Rauf, head of research at Ismail Iqbal Securities. “With the country returning to the IMF fold, the question remains: how to move away from adjustments to growth? Any projection for the New Year can only be a little more optimistic than what 2021 has delivered us.”



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