PDM fiddles while the economy burns

The only thing seesawing faster than the Pakistani rupee right now is Prime Minister Shehbaz Sharif’s political capital. So, here’s a contrarian take on what’s happening to the Pakistani economy. The real crisis is one of confidence, and not just economic fundamentals. Consider this: Pakistan faced a similar economic crisis at the beginning of PTI’s term and then again at the beginning of Covid-19. In both cases, stability and economic growth were restored. In fact, unlike most countries where public debt rose significantly during Covid-19, we were able to reduce our public debt-to-GDP ratio by about five percentage points through Covid-19. So, why does this economic crisis feel like the end of the world?

The underlying crisis of confidence this time is rooted in politics versus economics. Let’s unpack the previous economic crisis Pakistan overcame to contextualise this one better. To simplify, PTI’s core challenge in 2018 was inheriting an unsustainable current account deficit with the country standing on the brink of dollar default, while PML-N’s core challenge was to reverse fuel subsidies. The first two years of PTI’s government were hard for our economy because PML-N gave an ailing economy to Asad Umar.

The primary challenge was a current account deficit of $20 billion thanks to Dar’s fixation on keeping the rupee artificially overvalued versus the dollar. An artificially high rupee meant it was cheaper to import things than to produce them in Pakistan or export goods. Hence, our industry hollowed out, exports declined during PML-N’s tenure and imports we couldn’t afford thrived, bringing us to the verge of bankruptcy when PTI took over.

PTI took politically unpopular but wise decisions to correct these sins, including the painful devaluation of the currency. The idea was they would rescue the economy first, then stabilise and then put it on the growth path. Halfway through stabilisation, Covid-19 hit. Despite Covid-19 though, Pakistan clocked in growth at over 5% over the last two years. This was so good that PML-N argued last year that the numbers had been fudged by the PTI government, only to validate growth numbers this year after over-throwing the PTI government. PML-N even used these healthy growth numbers to secure the latest IMF deal.

However, when the PML-N was strategising to overthrow PTI through a vote of no confidence, their primary argument was that PTI was mismanaging the economy and a competent team was needed to restore order. Four months later, we are experiencing the fruits of labour from team competence, with the rupee nosediving and inflation skyrocketing.

In a provocative recent column, former State Bank Governor, Raza Baqir asks why this crisis feels more dramatic when the economic fundamentals are actually better than before: ‘Given that we successfully restored stability and growth in the recent two challenging crises, why is there not a shared sense of calm confidence that we should be able to do the same this time round? This question is particularly relevant because our reserves and public debt are better today than they were in the 2019 balance-of-payments crisis before the start of the IMF programme. At end-June 2019, our gross reserves had dipped to around $7bn; at end-June 2022 they were around $10bn.’

He goes on to argue about the central role politics is playing in this crisis. And the next logical question to ask is what is the core driver of the political instability in the country today? The answer to that question is simple, the vote of no confidence against former Prime Minister Imran Khan. The irony is that while PDM brought a no-confidence motion against Imran Khan, it’s the Pakistani economy that’s expressing no confidence in the PDM government today. If there’s one lesson everyone can learn from this train wreck, it’s that civilian Prime Ministers should be allowed to complete their five-year terms for both political and economic stability.

Published in The Express Tribune, August 7^th, 2022.

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