Economy in year 2019

That Pakistan’s economy went from bad to worse in the outgoing year is hardly debatable. At the outset of 2019, the PTI government was just about four months’ old, and the economy was — well, it still is — its foremost challenge, assigned to Asad Umar, the debutant FM. The PTI government had inherited a growth-intended economic model worked out at the cost of economic stability, mainly reflected in high current account and budget deficits. Umar’s predecessor, Ishaq Dar, had utilised the exchange rate tool to keep the rupee overvalued and thus the imports cheaper, but discouraging the exports in the process. The Dar model featured low interest rate to encourage local investment meant to keep the wheel of the economy moving for high growth levels. To the PTI, Dar’s recipe only dished out artificial growth as it was not based on fundamental economic factors. Umar, thus, sought to arrest the prevailing trend and go for “course correction”.

A month or two into its rule, the government found itself caught in a balance-of-payments crisis, and needed about $12b to avert a default. Instead of resorting to an IMF bailout package straightaway, the government decided to tackle the situation through “soft” loans from friendly countries. Talks for a $6b deal with the Fund, meanwhile, continued — with Umar lingering an agreement in the hope of a better bargain, inadvertently sending confusing signals to financial markets and the business community. As a result, the stock market tumbled, the rupee started losing its value, and businessmen went into a wait-and-see mode. An agreement with the IMF did come, but not before a change in the government’s economic team that saw Umar replaced by a tried and tested Hafeez Shaikh after eight months in service. A change at the SBP’s helm also came shortly, with Reza Baqir succeeding Tariq Bajwa.

With new men came the new recipe — to restructure the economy. The new team sought to achieve stability no matter how grave the implications of putting brakes to the economic activity. The twin deficit — of current account and budget — was the main challenge. The CA deficit meant that the country was importing more than it was exporting while the budget deficit suggested that the government was spending more money than it was generating. Thus came the fiscal tightening — a cut in the volume of imports to tackle the CA deficit and a cap on spending to tackle the budget deficit. The ensuing economic slowdown — coupled with the rupee depreciation, by about 30%, under a market-determined exchange rate regime; a two-fold increase in the policy rate over a period; and an unprecedented raise in power and gas tariffs and petrol prices — wreaked havoc with the home budgets, amid increasing lay-offs and pay-cuts. To add to that was an unrealistic tax collection target of Rs5.5tr for the ongoing fiscal year — a 40% increase year on year. The government’s fiscal tightening to address macroeconomic imbalances has brought down the GDP growth rate from an 13-year high of 5.8% — achieved in FY2017-18 — to 3.3% at the end of FY2018-19, besides turning inflation into a double-digit demon. Furthermore, structural reforms in various sectors of the economy remain a non-starter, loss-making industrial units and growing circular debt remain persistent worries, and public debts continue to balloon.

Now, midway through the fiscal year, the government says economic stability is achieved and the worst is over — a claim sort of substantiated by a major cut in the CA deficit, raise in the volume of exports and FDI, equilibrium in exchange rate, a bullish bourse, and an improved Moody’s rating outlook — and that it is now in a position to focus on steps to better growth rate. The government has thus conceptualised Rs5.5tr PSDP Plus programme to breathe some life into the economy and lessen the common man’s suffering. The economic challenge, however, continues into the new year.

Published in The Express Tribune, December 27^th, 2019.

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