Failure to learn

Published February 24, 2024
The writer is an associate professor of economics at Lums. He currently chairs the non-partisan Economic Advisory Group and is a nonresident Senior Fellow at the Atlantic Council.
The writer is an associate professor of economics at Lums. He currently chairs the non-partisan Economic Advisory Group and is a nonresident Senior Fellow at the Atlantic Council.

TAKE one look at Pakistan’s economic indicators, and you can’t help but wonder why we keep repeating our mistakes.

For decades, we have grown slower than erstwhile peers, educated our children more poorly, taxed unfairly, invested less, persevered with broken public enterprises and pursued broken macroeconomic plans. Yet we continue to trod down the same path. Why? Why don’t we fail well, fix our mistakes and move forward?

Nowhere has more futile ink been spilled and more news channel airtime wasted than in reporting each bump and hiccup of the exchange rate. Entire political careers have been built around reassuring people that the dollar will be brought to heel, even as the rupee lost on average 85 per cent of its value every decade between 1983 and 2013, and by about 170pc in this last decade.

First, consider Shaukat Aziz. The dollar was just under Rs59 when he became prime minister in 2004 and just under 61 when he left in late 2007. The PSX tripled during his tenure. Job done — if the job was creating the myth of Musharraf-era economic prosperity. Foreign exchange inflexibility meant that the current account deficit went from less than 1pc of GDP to more than 7pc during this time; consequently, within a year of Aziz’s departure, the rupee lost a third of its value and the PSX crashed back to 2004 levels.

A ‘technocratic’ government unencumbered by political considerations and steered by a polished New York banker had presided over the worst-ever decline in Pakistan’s international trade position. Yet a country distracted by a constitutional battle and an insurgency never widely acknowledged these mistakes, and this failure to learn would cost it dearly very soon.

When Nawaz Sharif was sworn into office in June 2013, the dollar stood at 98.5, international energy prices were low, and Chinese credit had started flowing in to finance CPEC.

If Pakistan was ever to learn about the folly of chasing a cheap dollar, the experience of the next five years would provide as clear a lesson as we’d ever need: Ishaq Dar’s fixation with keeping the dollar as cheap as possible meant that imports flooded the market and inflation was kept momentarily at bay, but also that the PML-N that had inherited a current account deficit of 1.7pc of GDP from the PPP more than tripled it to 5.3pc of GDP by 2018.

Just like Shaukat Aziz before him, Dar saw unsustainable PSX growth in his era, with the KSE-100 tripling in size before immediately collapsing thereafter and failing to recover for seven years.

Too many silent, yet powerful, undercurrents in the economy go neglected.

Just as the Daronomics alchemy was wearing off before elections, Dar’s — and Nawaz Sharif’s — immense good fortune was that they were both removed from office in the Panamagate scandal cases. The rupee slipped by 10pc in the 10 months of Shahid Khaqan Abbasi’s rule, and another 8pc under the caretakers, having not ended its slide when Imran Khan took office. There was never to be a referendum on 2013-18 era Daronomics and PML-N never bore the political cost of having caused the 2018 recession.

Like our politics, our economics gets messier after that. The dollar stood at just under 124 on Imran Khan’s first day in office in 2018. It was clearly undervalued and in the middle of a course correction. Yet Khan — never seriously having critiqued Daronomics in opposition — wasted valuable time before starting the Hafeez Sheikh era repairs, and then inexplicably reve­rsed that good work under Shaukat Tarin and presided near the end of his rule over a worsening of our balance-of-payments that was steeper in decline than any Ishaq Dar year.

Again, there was never a referendum on Imran Khan’s post-pandemic economic mismanagement. Instead of heading into elections with the chickens of inflation coming home to roost, both incumbent parties had been afforded space in 2018 and 2022 to set the political agenda, justifiably, around a narrative of injustice rather than delivery.

The tragedy of perpetuating this circus of constitutional crises, palace intrigues, and corruption scandals is that too many silent, yet powerful, undercurrents in the economy go neglected and basic errors perpetuated. In the last decade, multiple studies have shown that both 2013-era PML-N and 2018-era PTI increased protection of some industries, increased inefficient subsidies to chosen sectors and managed CPEC loans in grossly unsustainable ways.

To this day, we insist on keeping the dollar as cheap as we can in the short term and reap the harvest of ever-declining exports and rising debt that results. There is still no serious plan to pay off our debt.

Even in this turmoil, there is space to improve. We need to develop professional economics institutions, empowered and resourced to do the necessary groundwork. We need technically grounded feedback from our opposition benches. The fateful Indian economic reforms of 1991 were steered by a core of bureaucrats, politicians, and external advisers who had worked on finance and commerce portfolios for at least a decade before that moment. They were bolstered by weighty reports — often book-length in detail — reflecting on the state of the Indian economy that various ministries and the central bank had worked on during this time.

A few notable documents excepted, Pakistan has lost this culture of doing its homework. The media industry bears responsibility too. A decade into a crisis that has echoes of the past, we remain so hypnotised by the day’s stutters in the US dollar, PSX and the latest CPI numbers that we haven’t paused to dig deeper and ask harder questions about, inter alia, the trade and fiscal balances.

If we continue policies we’ve pursued over the last four decades, we can expect the decline to continue apace. Defending the exchange rate in the short term and neglecting our debt, trade and productivity positions will cause continued erosion of the rupee. Even at pre-2013 rates of decline, that means that a dollar in 2034 will cost upwards of PKR 2000.

We can start preparing for that future, or finally change course.

The writer is an associate professor of economics at Lums. He currently chairs the non-partisan Economic Advisory Group and is a nonresident Senior Fellow at the Atlantic Council.

Published in Dawn, February 24th, 2024

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