The limits to growth

Published September 28, 2023
The writer is a business and economy journalist.
The writer is a business and economy journalist.

ONE piece of feedback I often hear from readers is that my articles are ‘too depressing’. Here is some advice for those who feel this way: pop a Prozac and go shopping.

This has a number of advantages. The first is obvious; retail therapy works and works even better with fluoxetine in the bloodstream. Besides this, it is also a good idea to convert your rupee holdings into goods at the soonest because those rupees will command less and less value with the passage of time.

What would people prefer? That I tell you happy things at a time when the economy is bursting with inflationary pressures? Back in 2021, I wrote a series of articles about how the State Bank was pumping massive quantities of printed money into the system and setting the stage for an equally massive crash, characterised by a rapid depletion of the foreign exchange reserves and an inflationary spiral the likes of which we have not seen in our history.

The series prompted a ‘rebuttal’ from the State Bank, accusing me of using ‘classical economic theories’ in the middle of a ‘once-in-a-century pandemic’. The ‘rebuttal’ went on to lean heavily on Covid-related lockdowns to justify its actions.

Never mind that the Covid-related mitigation measures had all been withdrawn months earlier. Never mind also that the State Bank continued to pump printed money into the system for years since then, using various instruments such as artificially low interest rates, refinance facilities and outsized long-term open market operations to do so.

In December 2021, (a month after the ‘rebuttal’) they floated the first of these instruments, injecting more than Rs1.5 trillion into the economy against an unprecedented 63-day OMO. From thereon, these injections continued, until in February this year they were asked specifically about the total amount outstanding under these OMO injections and the reply was Rs6.5tr.

That is a staggering amount of money to inject into an economy. These funds were hot off the printing press before they were handed over to the banks, who then lent them to government.

These same banks could then take the government debt instruments, hand them to the State Bank, and lend more from the OMO window against them for onward lending to government. This cycle, from the State Bank to commercial banks to government and back again, has continued unabated since December 2021.

The gains the rupee has seen in recent weeks will be very difficult to sustain.

From July 2023 till now, an amount slightly less than Rs10tr has been pumped into the economy via nine separate long-term OMOs. How much of this remains outstanding and how much has been mopped up is difficult to calculate, but it is easy to see that if even half of these funds are sloshing around the system they are doing massive damage to the ability of the rupee to command any value in the market.

Now tell me something. Would people have preferred it if I had lied to you back in 2021 and said ‘all is well’? It might have felt good at the time, but did all turn out well since then?

The rupee has gone from 150 to a dollar in May 2021, when the troubles began for the exchange rate, to beyond Rs300 in the summer of 2023, before it came off that peak in recent weeks to slightly below 290. If it was depressing to hear in 2021 that we are now poised for a very large inflationary and devaluation spiral, what would have been a less depressing thing to talk about back then?

Even now, there is no indication that the cycle of inflation and devaluation that was launched in 2021 has peaked. The rupee has registered some gains against the dollar in recent weeks, but recall it did the same last year when Ishaq Dar launched his version of a ‘crackdown’. That brief spell of stability ended with a bang in January this year because the underlying reality of too many rupees chasing too few dollars had not changed.

So at the risk of sounding depressing once again, perhaps it is worth pointing out that the underlying pressures that are responsible for creating this epic spiral of devaluation, which is now well into its third year running, have not abated. With those pressures in place, the gains the rupee has seen in recent weeks will be very difficult to sustain. It is hard to say when this spell will break. But it is reasonably easy to say that break it will.

In a sense, we have hit the limits of our growth model. This was the conclusion from a two-day event hosted by the Pakistan Institute of Development Economics and the World Bank in Islamabad last weekend. There is now no room for this economy to grow given its internal structural deficiencies. The moment is clearly marked ‘reform or perish’.

But a few things are standing in the way of the real reform conversation that is needed urgently. First is the confusion around what actually ails us. Second is the undying search for quick-fix solutions, some handy magic that can yield results within weeks or months. Third is the assumption that our economic problems are someone else’s job to fix.

Taken together, these sorts of obstacles lead us towards quack solutions. One example is provided by our esteemed commerce minister, Mr Gohar Ejaz, who said recently that exchange rate reductions can enable interest rates reductions too, before going on to point out that ‘interest is haram’.

It is futile to point out to him that exchange rates and interest rates cannot both move in the same direction, especially when the country does not have the foreign exchange reserves to sustain such an action.

To propose such a thing is a bit like proposing a water car as a solution to our persistent energy import bill. It is time to wake up, even if doing so is depressing.

The writer is a business and economy journalist.

khurram.husain@gmail.com

X (formerly Twitter): @khurramhusain

Published in Dawn, September 28th, 2023

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