THE two historical events of 2023 — the breakout of the Israel-Palestian war and the spread of artificial intelligence — will continue to impact geopolitics and geoeconomics across all geographical regions throughout 2024.

The post-May 9 change in Pakistan’s political landscape in 2023 and the post-Israel-Hamas adjustments in the country’s geopolitical stance may impact the February 8, 2024 elections. The outcome of the elections and the kind of democracy we may have to live with afterwards, plus the strength of the civil military-run Special Investment Facilitation Council (SIFC) established in 2023, will have a far-reaching impact on Pakistan’s economy in 2024 and beyond.

The two most important areas to watch closely will be foreign trade and foreign investment and fiscal-monetary coordination. Although SIFC has been set up exclusively for attracting foreign investment, its defined scope of operations is so wide that steering foreign trade in the desirable direction — dramatic growth in exports at the lowest possible increase in imports — will remain largely dependent on SIFC’s workings. So, let’s see what happens.

As for fiscal-monetary coordination, the role of SIFC, the Ministry of Finance, and the State Bank of Pakistan (SBP) will all remain attached to (1) the ifs and buts of the International Monetary Fund (IMF) and (2) friendly countries’ willingness to roll-over the funds they have placed with the SBP and (3) the attitude of key global financial institutions including the World Bank towards Pakistan.

Even if ideal conditions prevail next year to tame back-breaking inflation, containing soaring food prices will be much trickier

In 2024, inflationary pressures may or may not subside depending upon the intensity of the supply-chain disruptions due to attacks on shipping lines by Houthis and counterattacks by the US forces, as well as the rate of economic recovery in Pakistan and the nature of net growth in the country’s agricultural and industrial outputs plus the level of governance especially federal-provincial coordination in disciplining markets — or the lack of it.

The ongoing documentation drive, in conjunction with the efforts being made to broaden the tax net and digitalise financial transactions, may help the central bank improve its not-so-good transmission of monetary signals.

Substantial improvement, if achieved in 2024, will restore firms’ and economic agents’ confidence in monetary policy as a major tool for fighting inflation. But here again, the important thing to monitor will be the fiscal attitude of the newly elected government. Can a newly elected government afford to tighten fiscal belts, cut current expenses, continue to raise gas and electricity prices to reduce circular debt, privatise loss-making mega state-owned enterprises, including PIA and Pakistan Steel, speedily and hand over the management of electricity distribution entities (discos) to the private sector? Only time will tell.

If the existing trade policy framework is implemented in 2024 in letter and spirit, only those exporters who enter the least-explored markets and those who come up with the most competitive high-end products will be able to survive

More importantly, if the newly elected government cannot do one or some of these things, what will be the response of the IMF and, of course, of SIFC?

One can only hope that sanity prevails and the things that must be done to correct structural imbalances in the economy are done somehow. That Pakistan is not going “to get rid of” the IMF support in 2024 is written on the wall. Our external economy is so fragile that entering a long-term borrowing arrangement with the IMF after the completion of the current $3.2bn short-term programme is obviously inevitable.

The private sector should not expect much relief in the form of interest rate easing in 2024 either. The reason is that the central bank has been, still is, and may always be under IMF pressure to keep the real interest rate positive. If inflation does not decrease dramatically fast enough, the SBP will not go for substantial interest rate easing on merit. It is a separate story, though, if the incoming elected government repeats the old mistake of dictating the central bank.

And even if interest rates are eased somewhat after noticing visible signs of inflation falling, the ongoing rationalisation of interest rate subsidies will continue. This means that only those industries and exporters will have access to subsidised interest rates that show a certain level of competitive output or export growth performance.

That is where the role of the trade policy framework and the government’s fiscal orderliness will come into the picture. If the existing trade policy framework is implemented in 2024 in letter and spirit, exporters who enter the least-explored markets and those who come up with the most competitive high-end products will be able to survive. Others will suffer.

This applies to merchandise exports as well as services exports. In terms of fiscal orderliness, the incoming government will have to continue to shift its commercial bank borrowings to non-bank borrowings — more government debt will be sold through the Pakistan stock exchange, and larger mobilisation of funds will be made through National Saving Schemes. This shift may reduce banks’ dependence on investing in zero-risk government debt papers and compel them to lend more to the private sector.

But pushing banks towards increased lending to the private sector without reducing their corporate tax burden — the highest in the region —will not work. How the new government will walk this tightrope will be worth watching in 2024. Even if ideal conditions prevail next year to tame back-breaking inflation (which is, by the way, next to impossible), containing food inflation will be much trickier.

Pakistan’s textile sector is in trouble, and export growth originates mostly from the food sector. Sustaining this growth pattern in exports would mean compromising food availability at home at affordable prices.

That is where the level of governance across the country and coordination between the federal and provincial governments of the future will become a deciding factor. If the markets are not brought under greater discipline and if federal-provincial coordination remains low or missing, containing inflation, particularly food inflation, will continue to remain difficult.

Published in Dawn, The Business and Finance Weekly, January 1st, 2024

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