Editorial

Economic balancing act

High interest rates will keep investment and consumption low, limiting any real GDP growth

July 05, 2023

Barely a few days after the announcement of the new deal with the International Monetary Fund, credit rating agencies Fitch and Moody’s are already warning that the deal will not be enough to get Pakistan out of its economic quagmire and that several billion more need to be coupled with even more painful economic reforms before a meaningful recovery can begin.

While Pakistan did get pledges worth over $9 billion at a moot in January, countries are usually under no real obligation to follow through on such pledges. And even if everyone came through on their pledges, the government still has to pay back about $25 billion in the ongoing fiscal year. True, Pakistani investors were extremely bullish on news of the new deal — best symbolised by Monday’s record gains at the Pakistan Stock Exchange, where trading had to be halted for an hour early in the day due to the sharp spike in the index. However, within this bullishness was a partial explanation for the rating agencies’ concern — among the stocks that gained the most were automakers, which have seen prolonged closures due to import restrictions imposed to help the country conserve dollars. The new IMF deal did away with these restrictions, which is a boon to industries dependent on imported raw materials, but will also send us back to the same unsustainable trade deficits that ate through our forex reserves the last time. It should also be noted that the government and local industry are in no position to address the trade deficit organically, as there are no local substitutes for most imported raw materials or other industrial components, and investing in industries that would make such substitutes available, while necessary, is not a viable short-term option.

Meanwhile, high interest rates will keep investment and consumption low, limiting any real GDP growth. Experts also warn that the future will remain opaque till elections are held and a new government exercises its mandate to set an economic direction. But even with a strong mandate, the slightest hiccup — such as delays in receiving secondary financing — could steer the economy off a cliff.

Published in The Express Tribune, July 5^th, 2023.

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COMMENTS (1)

Azeem Hakro | 1 year ago | Reply International organizations and NGOs often release attention-grabbing reports every week. Sometimes they say that Pakistan doesn t have enough food and other times they compare it to countries in central Africa where hunger is a big problem. They highlight the lack of wheat and blame the government and people for their circumstances. They also say that climate change is causing disasters. They make it sound like the economy is collapsing and agriculture is getting worse. Sometimes they say you don t have enough money for imports. What will happen How will imports be possible Even though everything is available here the Pakistani people don t worry about it. They are living a comfortable life and feel like there are no issues or tensions. They believe in living a carefree life as if it s only for a short period. They don t even know what inflation means. They experience the rush at train stations marketplaces wedding venues and other crowded places. But experts present everything in a scary way but regular people are not too worried. They continue to live their lives as they always have. Yes prices are going up but everyone still manages to have three meals a day. In Pakistan 64 of the population is involved in agriculture. They store their wheat harvest and feel secure about having enough food for the whole year. The other 34 who live in cities might find things expensive but they can still make a decent living. Pakistan will keep going as it is. However the day when many things improve is getting closer. Pakistan has a young population with 60 being young people. They have a lot of talent. When they get good opportunities the country and its people will surely succeed and prosper.

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