Pakistan’s economy has for long been on a rollercoaster ride. It is an economy which needs to be fixed all across the board. How uncertain the situation is illustrated by the fact that in the last three years we have had a succession of finance ministers, who could not produce the desired results and had to go.
Now we have a new finance minister in Shaukat Tarin, who has his own ideas how to fix the economy. He has announced that Pakistan can no longer afford the stabilisation policy, which the government has pursued in the last three years under the supervision of the International Monetary Fund (IMF). According to Tarin, a high growth rate is the only way out of the economic mess we are in. It seems he intends to roll back the current economic policy mat and go from the International Monetary Fund (IMF) contractionary approach to the growth model.
To recall, Ishaq Dar — the man who managed the economy during the previous Pakistan Muslim League-Nawaz (PML-N) government of Prime Minister Nawaz Sharif, believed that a high growth rate was the panacea for all our economic ills. Dar has been accused of generating artificial growth, mainly by adopting a fixed exchange rate regime to prop up a falling rupee and keep the inflation low. The policy kept the people happy and yielded rich political dividends. Ishaq Dar used the exchange rate tool to keep the rupee overvalued. It made the imports cheaper but retarded exports. To manage things, the government had to resort to deficit financing, purchasing dollars from the open market to ensure a fixed parity with the rupee. Dar succeeded in increasing GDP growth, but at the cost of economic stability. The country constantly experienced high current account and budget deficits.
It was the PML-N’s preferred economic management model. The question is: Is the formula workable? As things stand, we face a plethora of problems. The business climate in our country is not conducive to trade and investment. We are faced with unending political chaos, lack of peace and security, high operational costs due to exorbitant utility tariffs and lack of technology and automation, low growth potential, dilapidated transport infrastructure and absence of tax incentives, etc. In the situation, an easy way out for an elected government is to rely on imports and use the exchange rate tool to generate growth, which is necessary to create jobs, subsidise the low-income groups and provide social protection.
Experts differ on the efficacy of the model in the long term. In the model, growth comes at the cost of economic stability. The model can be used as an interim policy measure so that the economy can gradually move in the direction of stable, self-sustaining growth. But the Pakistan Muslim League-Nawaz (PML-N) government put political gains over the larger interests of the economy. It took massive loans and thus jeopardised our economic future. No attempt was made to address the fundamental flaws of the economy and improve the business climate for investors and exporters. Dar’s reliance on artificial ways and means to achieve growth was bound to boomerang sooner than later.
It needs to be added here that earlier, the use of the exchange rate tool to keep the rupee-dollar parity fixed and bolster the foreign exchange reserves was seen during the Musharraf era when Dr Ishrat Hussain — currently the PM’s adviser on institutional reforms and austerity — was heading the State Bank of Pakistan (SBP). By the way, following in the footsteps of Ishaq Dar, the PTI government too purchased dollars — worth $4.5 billion — from the open market to support the exchange rate, before entering the IMF loan programme in July 2019.
According to experts, the Pakistan Tehreek-i-Insaf (PTI) government, while going for the economic stabilisation program, was wrong to agree with the International Monetary Fund (IMF) to let go of the exchange rate tool and allow the dollar to fly as high as it could without first taking steps to pave the way for raising foreign exchange earnings through exports. The tragedy is that we do not have a large number of exportable products to take advantage of a cheaper rupee. It remains to be seen how Shaukat Tarin manages the economy and combines stability with growth. His main challenge is to rev up the wheels of the economy both to generate employment and boost industrial growth. But, above all, he will need to move fast to contain inflation, which has totally upset the budget of the average household in the country.