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The country seems to be caught in the old pathology of consumer driven growth without expanding
The denouement of the political drama has yet again underscored the scourge of political instability that has afflicted Pakistan since independence. The baleful ripples of the instability are being palpably felt by traders, economists and the common people whose disposable earnings are being rapidly eroded due to high inflation and steep depreciation of national currency. The traders and industrialists including small and medium enterprises are being worst hit with direct cost of production rising 20% in recent few weeks. The implacable rise in the cost of doing business due to costly power, transportation, gas and industrial raw materials is feeding into the entrepreneurial anxiety leading towards a depressed economy.
The reasons for the devaluation with this unexplained celerity are being ascribed to the rapidly dwindling foreign exchange reserves and a widening current account deficit. The country seems to be caught in the old pathology of consumer driven growth without expanding the export base and volumes which could address our perennial problem of current account deficit. This happens because instead of production oriented growth our consumer driven import based model saddles the economy with a deficit that accompanies growth like a sable shadow. According to government’s recent Mid-Year Budget Review the current account deficit had widened to $9.1 billion between July to December 2021 and, according to Dr Hafeez Pasha, was expected to reach $20 billion by the end of the current financial year. The foreign exchange reserves of Pakistan have been depleting sharply since past few weeks with State Bank reserves alone depleting by $4.2 billion in March 2022 to reach a figure of $12.047 billion, the lowest ever since October 2020. According to some independent non-bank sources, the reserves have further reduced by $1 billion to a figure of $11 billion.
The implications of this double whammy of widening current account deficit and depleting foreign exchange reserves are dire. Unless the currency is stabilised and the foreign exchange reserves boosted through injection of liquidity to the tune of $3-4 billion, an immediate stabilisation is not possible. The reasons behind the above instability are structural and not amenable to placebo solutions. The rising interest payments, expenditure on subsidies, and unbridled consumerism are the structural problems that the government has failed to address. The increasing oil and commodity prices internationally are also not helping the matter by feeding into the current account deficit. The balance of payments crisis that the country was facing even before the vote of no-confidence against the PM is being exacerbated diurnally due to the political instability in the country.
According to academic sources, there is a direct correlation between political instability and economic meltdown. A sample study of 113 countries by Alberto Alesina, Roubini and Swagel defines political instability as the propensity of a government to collapse. That propensity or its semblance results in lower economic growth and per capita decrease in GDP. Another study by Yi Feng, covering 96 countries between 1960 and 1980, indicates that the stable democratic regimes are likely to post sustained economic growth compared to politically unstable regimes. Another empirically researched report about Jordan from Osama D Swaidan — employing two econometric techniques: ARDL model (OLS) and Kalman filter (ML), covering the period from 1967 to 2009 — indicates that political instability has a statistically significant negative effect on economic growth.
With above academic research clearly pointing towards negative impact of political instability on economic performance it is pertinent to consider KK Aziz’s conclusion about the weak political culture and its relationship with a culture of political impunity from accountability due to weak democratic traditions in a country. An unstable polity results in reduced economic growth and inequality on society. When finance minister Shaukat Tarin declared in May 2021 that the government would spend $5 billion on creation of new jobs and take the economic growth to over 5% on sustained basis there was a strong whiff of expectation in the air on human security front. The continual political wrangling and political instability soon resulted in scaling down of those objectives by November 2021, ostensibly to cool down an overheated economy to address the burgeoning trade deficit.
The political instability has dampened Pakistan’s export performance and GDP growth. A country that exported more manufactured products than Malaysia, Thailand, Philippines and Indonesia combined in 1960s only exports $23.79 billion now, whereas going by its exports performance in 1960s it should have been exporting over $100 billion in dollar terms at present. The lost decade of 90s is a sad metaphor for Pakistan’s economic slide due to political instability sinking the country in foreign debt due to slow growth, sinking exports and dwindling revenues. According to Ishrat Husain, the incidence of poverty grew from 18% in 1988-89 to 33% by end of 90s due to poor governance and frequent changes in political regimes. He points out that short-term political horizon and political insecurity prevented the successive civilian governments to control the rent seeking behaviour of the business, bureaucratic, political and feudal elite. This resulted in a structural deformity in our economy because of which we are caught in a perennial debt creating cycle of measly exports and munificent imports, fueling a consumerist economy.
The current political instability prognosticates bleak prospects for foreign as well as domestic investors. The current political fracas has diverted the attention of national economic managers from the unfolding economic crisis resulting in free fall of rupee and a climate of uncertainty impacting adversely upon the growth and development prospects of the national economy. The stabilisation attempts by Pakistan’s economic managers to get debt relief, concessional currency swaps and access to Chinese Covid-19 related IMF funding quota have also been overshadowed by the current political instability.
There is an urgent requirement for all stakeholders to take cognisance of the issue and play their part in restoring political stability to help national economic managers refocus on economy. There is a need to declare an economic emergency to take urgent steps to arrest the currency slide and widening current account deficit. In the long term, structural changes to enhance industrial productivity and exports is de rigueur along with measures to promote inclusive growth to discourage elite capture of state resources.
Published in The Express Tribune, April 18th, 2022.
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