The remarkable recovery!

When I hear our media pundits discuss the state of Pakistan’s economy, I am stunned by their ignorance. During the past two years, Pakistan has made a remarkable recovery, but most people seem oblivious of this fact. It’s a simple and shocking story, based purely on numbers and maybe it remains obscured for this reason — numbers are boring.

In 2013, when Nawaz Sharif came to power, Pakistan’s imports of goods and services were around $48 billion and its exports of goods and services stood just over $31 billion. Remittances were approximately $13 billion and while the situation was precarious, as foreign exchange reserves were around $6 billion, the situation was manageable.

Over the next few years, under the PML-N) government, our imports skyrocketed to almost $68 billion — an increase of over 40%, while our exports stagnated and fell to $30 billion — a decline of 3%. Remittances increased to about $19 billion. For a country with extremely limited foreign exchange, this was suicide on steroids. The massive and growing imbalance between our exports and imports, should have forced the rupee to depreciate, but in a dangerous political move, the PML-N artificially maintained the rupee-dollar exchange rate between 100-110, bleeding the reserves of the State Bank of Pakistan (SBP). In the final two years of the PML-N government, the SBP reserves fell by more than half to around $9 billion, when Imran Khan became the Prime Minister.

In August of 2018, Pakistan was in the midst of a full blown economic catastrophe. A massive current account deficit, which when combined with our long-term financial debt obligations, created a hole of $25-30 billion, while the SBP had foreign exchange reserves of less than $10 billion. This impending financial disaster, resulted in Imran Khan’s infamous tours around the world to beg for financial help due to the criminal mismanagement of the economy by PML-N.

I am astonished that none of our anchors have ever bothered to question the financial geniuses belonging to PML-N about these numbers. How could they justify the increase in imports or the bleeding of the forex reserves by artificially maintaining an unsustainable exchange rate? What was their plan?

Anyway, when you need $20-30 billion and have less than $10 billion, what do you do? You beg, borrow and... And then you fix the mess, created by your predecessor. Reduce imports, increase exports, stop the bleeding of SBP reserves by artificially maintaining an overvalued exchange rate and pray for continued growth of remittances.

In two years, the government of Imran Khan achieved an unbelievable turnaround. Pakistan’s imports went down to $50 billion, a decline of $18 billion. Exports declined by $2 billion, to about $28 billion. Remittances crossed $23 billion, an increase of over $3 billion and SBP forex reserves have just crossed $12 billion. The PML-N left Pakistan with a current account deficit of almost $20 billion, while the PTI government is now expected to post a current account deficit of around $1-2 billion, in the current fiscal year. No one predicted such a quick turnaround, not even the IMF.

In essence, the PML-N government turned Pakistan into the Titanic, searched for the biggest iceberg and rammed into it, but somehow the PTI government has managed to turn the ship around and plugged the hole — a $20 billion hole. Unfortunately, this recovery, just like any recovery, came at a cost. In order to reduce imports and prevent the complete decimation of forex reserves at the SBP, the PTI had to end the delinquent exchange rate policy of PML-N. They allowed the depreciation of the currency, and the rupee-dollar exchange rate went from 110 to around 160, in a short period of time. This not only helped curb imports, by making them more expensive but helped the SBP boost its reserves.

Pakistan’s biggest import is oil and as the rupee depreciated, oil became expensive and this led to high inflation within the country. Inflation in Pakistan has always been closely linked to oil prices. For example, when the PPP came into power in 2008, oil prices increased from around $100/barrel to $150/barrel and Pakistan subsequently experienced double digit inflation. Similarly, when the PML-N came into power in 2013, average annual price of oil was around $100/barrel but by 2015 fell to about $50/barrel and PML-N was able to boast of low inflation below 5%. The double digit inflation being suffered by the PTI is again linked to the increase in oil prices, which was due to the depreciation of the rupee – a depreciation which was inevitable due to the inexcusable management of our imports and forex reserves by PML-N, especially in their final two years.

It is beyond belief that despite the availability of these harrowing figures, the PML-N continues to get a free ride in the media vis-à-vis their handling of the economy while the PTI is crucified for preventing a complete financial collapse.

I will conclude this article by stating that the economy is a large subject and the external sector, discussed above, is an important part of the picture but not the entire story. However, it was the criminal mismanagement of this sector that brought Pakistan to the brink of economic collapse, adversely affecting other variables such as inflation, growth and unemployment and the recovery in this sector is the most significant development for our economy, at the moment. It has laid the groundwork for achieving objectives related to growth, unemployment, and inflation over the coming years which would have been a pipe dream had the PTI failed to overcome this herculean challenge.