WASHINGTON: Pakistan’s economy is in a tailspin, going from crisis to catastrophe and now the system is becoming unhinged, warns Pakistani-American economist Atif Mian.
Mr Mian, a professor of economics at the prestigious Princeton University and the first Pakistani to rank among the 25 top economists of the world, blames “judiciary, politicians, and generals” for this situation.
“The last couple of years have witnessed a level of chaos, infighting, and jostling for selfish power grabs that has brought the country to this catastrophe,” Mr Mian said in a series of tweets he posted on Wednesday.
“We can see this in the increasing stagflationary forces: growth is rapidly falling, and prices are rapidly rising. These are very worrying signs,” he wrote. Stagflation is persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.
According to Atif Mian, inflation in Pakistan is not only being fuelled by large deficits and money printing but “foolish policy choices” that have seriously impacted the productive capacity of the economy.
Referring to recent data on Pakistan, he warns, that the “economy is going off the rails” and cites several factors.
First, exports: There was a global surge in exports post-Covid, but around the 2nd quarter of 2022, Pakistan’s exports drop off relative to India and Bangladesh - the gap is now over 20pc.
This happened despite the large currency devaluation and all “efforts” to boost exports given the severe balance of payments issue.
The export drop likely reflects serious supply-side disruptions in the economy, “most notably the inability to get into an IMF agreement,” writes Mr Mian while blaming the government’s “extreme mismanagement” for this situation.
“What the PDM govt has done is on another level. It removed the central bank’s governor with no plan in mind, started in-fighting against its own FM, and ultimately replaced him with a close relative of the PM - competence be damned,” he wrote.
“What followed has eroded any remaining confidence in the system,” said Mr Mian, referring to the government’s efforts to keep the exchange rate to Rs. 200 to a dollar as reserves were going to zero and the exchange rate toward 300 to a dollar.
The government’s policies, he wrote, led to a negative supply shock in the midst of a full-blown currency crisis, adding that the drop in exports highlights the negative supply-side shock.
“This is how a country loses credibility, a feeling that either nobody is in charge, or those in power have no idea what they are doing,” he wrote. “Pakistan’s price level … is off the charts, and extremely dangerous … millions are falling back into poverty.”
Noting that large deficits and constricting supply were a recipe for hyperinflation, he added: “The exchange rate will naturally mirror the price level — it’s a law of nature: you cannot control the exchange rate, at least not with this level of incompetence.”
One of the most important aspects of policy making, Mr Mian argued, was to provide confidence in the system - that people can invest in the long-term for a better future. “That confidence is now missing … Pakistan’s nervous system is fundamentally broken.”
Mr Mian urged those who run the country to rebuild the nervous system, which he described as a combination of administrative and political structures that guarantee a certain level of confidence in the economy.
Published in Dawn, April 6th, 2023
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