Eight hundred thousand new tax filers. Exports up 12%. New circular debt down by 68%. These are three positive headlines on Pakistan’s economy no one wants to put in a headline. But they’re only the tip of the iceberg as there’s a dramatic upswing in our macroeconomic indicators. Trade deficit down to 41-month low. KSE gaining almost 5,000 points in 50 days. Remittances and inland revenue up by 10% and 25%, respectively. Foreign portfolio investments at record levels in the last quarter. Current account deficit down by 55% in the first two months of the fiscal.
The juxtaposition of this good news with the punishing state of the real economy — measured by inflation and unemployment — means we’re standing in the darkest hour of Imran Khan’s resurrection of the economy. I call it a resurrection because the exciting part isn’t that we’re passing through the worst and things will get better in the real economy within a year, but because the sources of growth and fundamentals of the economy are transforming. In this column, I’ll unpack the method behind the madness of PTI’s perplexing economic transformation project.
Recall, Ishaq Dar and Miftah Ismail delivered a sick Pakistani economy on a stretcher in the emergency room to Asad Umar who had the unenviable task of giving chemotherapy to a metastasising cancer of fiscal and current account deficits ripping through the economy. Now, chemotherapy is an extremely debilitating medicine. You get sicker, start vomiting and lose your hair. Some patients are so sick of the medicine they prefer to not be treated. But if the patient has a healthy prognosis, the doctor’s priority is to save the patient’s life, no matter how painful the treatment.
This is exactly what Umar sought to do, with a homegrown reform process (versus one done by IMF). Being the impatient patient, we mistook the debilitating medicine as the enemy versus the actual disease (a sick economy). Things got so bad that we changed doctors mid-treatment but not the treatment journey itself. And now the results of that chemotherapy are beginning to show in the dramatic upswing of macroeconomic indicators. Does this mean the patient is healthy again? Not yet. We’re still in treatment but it’s working.
And now, for the exciting part. Say the reason we got lung cancer was that we loved smoking. Once recovered from the chemotherapy, will we return to smoking or will we kick the habit and become a fundamentally different person? In Pakistan’s case, we were smoking dollars we didn’t have by keeping the rupee artificially overvalued so elite consumption could be subsidised. This led us to keep borrowing money and fall into debt traps with the IMF. What’s exciting is this government’s commitment to keeping the rupee at its real value. This is creating a collapse in import-dependent businesses — painful, but in the long term will force businessmen to get into productive sectors of the economy versus staying on as traders. This is how market incentives work.
Another area of transformation: taxes. Pakistan’s economy is unhealthy because we don’t raise enough revenue to meet our expenses, causing us to borrow money and getting trapped in escalating debt. The core issue here is we never had the political will to go after anyone except the salaried middle class. Now, FBR is going after retailers, wholesalers and real estate transactions, which is great for raising the tax base and will also force people to invest in productive businesses versus parking their money speculatively in real estate.
The PTI needs to be more aggressive and ideological in pursuing this reform process while enhancing the social safety net for those falling behind. That said, the macroeconomic numbers don’t lie for now; the economic transformation triggered by the PTI is real and working. Even after the darkest night of the year, the sun rises in the morning. And Naya Pakistan’s moment in the sun is coming.
Published in The Express Tribune, October 20th, 2019.