Jhe global connectivity and interdependence of economies have opened up new horizons for growth and development. At the same time, these have given rise to a phenomenon where economic and political turmoil anywhere in the world can have a negative impact on other countries.
While the difficulties linked to Covid-19 have triggered a new recessionary situation for the world, the weakening of the pandemic has revived hopes of recovery. However, some indicators indicate that the global economy is once again heading into a recession. This is due to high inflation, supply chain disruptions, subdued growth and stagflation which is expected to last longer unless timely corrective action is taken.
The World Bank predicts a slump in global economic growth in 2022, in part due to the protracted war between Russia and Ukraine, global inflation and rising interest rates. She fears several years of high inflation and weak growth that can have destabilizing consequences for low- and middle-income economies.
Pakistan is also experiencing this unfortunate situation due to the rising global cost of energy and high commodity prices, coupled with the appreciation of the US dollar against the rupee. These factors posed multiple challenges to our economic managers and aggravated our macroeconomic imbalances.
The continued depreciation of the Pakistani rupee, stagflation, rising bond yields, dwindling foreign exchange reserves and increasing import restrictions have affected the country’s overall economic situation. The corrective measures taken by the government are proving insufficient to avert the risk of default.
Amendments to the State Bank of Pakistan Act 1956 by the previous government also pose difficulties in addressing these monetary challenges. These left the State Bank of Pakistan (SBP) with a very limited administrative role in remedial intervention. The government can no longer solve various problems, including price control and stabilization of the rupee-dollar parity.
Although the Government of Pakistan has improved its monetary policy framework by enhancing the functional and administrative autonomy of the SBP, the prevention of government borrowing from the SBP and the embedding of price stability are the main objectives of the new regime. .
The government and the SBP need to reassure all stakeholders about the current situation and find a way forward. The recent measures taken by the SBP appear to be desperate measures. It restricted the importation of certain items by adding to the pre-approval condition and decreasing the amount of open letters of credit – conditions that severely affect businesses in an import-based economy where the community of business has trouble clearing their goods.
At the same time, it has attracted demurrage at local ports and late payment penalties internationally. In addition, it has been reported that some life-saving drugs are at risk of shortage due to non-availability of imported raw materials. Additionally, automakers are announcing production shutdowns amid political uncertainty and economic distress.
The recent aggressive measures taken due to the correction are weighing on the overall economic situation, with inflation figures and policy rates rising to an alarming level. It’s nearly impossible for a business to leverage growth or even bridge financing. If this situation persists, a wave of economic slowdown is expected. This can lead to unemployment and hyperinflation leading to civil unrest.
The government has signed a staff level agreement with the International Monetary Fund (IMF). Its meeting of the board of directors for the final decision is scheduled for the month of August. The government expects the release of the IMF loan tranche to help normalize the situation. The import restrictions imposed by the SBP aim to maintain foreign exchange reserves at a certain level to avoid a situation leading to a default.
After the latest staff-level agreement between the IMF and Pakistan reached on a combined successful 7th and 8th review of the program, it is hoped that IMF Executive Board approval will soon follow and the disbursement of funds will help improve the macroeconomic situation of the country.
Most experts say that contrary to the prevailing hype, Pakistan cannot be bludgeoned with countries that are on the verge of default. Its external debt-to-GDP ratio and its short-term component are still manageable. However, they warn that if there is a failure to devise a long-term strategy for economic recovery, the national economy will head south.
The successful completion of the ongoing review and the disbursement of IMF funds are critical at this stage as they will help close the external financing gap and send positive signals for Pakistan from international markets.
Simply releasing funds from the IMF will not be enough to resuscitate our economy. Pakistan’s needs are much higher than the amount expected from the IMF or Saudi Arabia. These can only be met by improving relations with the global community through confidence-building measures. The role of our Ministry of Foreign Affairs is essential in restoring our relations with the rest of the world.
The current economic scenario demands that Pakistan reverse the amendments made to the State Bank Act 1956 regarding the free floating of the dollar. This can only be done when Pakistan has enough financial support from its friends that the government can raise revenue without IMF support and repeal laws designed to meet its conditions. Relying solely on the IMF without introducing structural reforms will result in further deterioration of our economic conditions and even a risk to national security.
Faced with deteriorating economic conditions, it seems that the government does not fully appreciate the importance of the economic challenge. That the SBP is still functioning without a full-time governor since Reza Baqir left after his three-year term ended in May 2022 is not a good sign. An institution as important as the country’s central bank should not be run by an interim governor who has failed to control speculative transactions undermining the strength of the rupee.
Political stability should be the first priority in the roadmap to recovery. Ongoing political unrest adds fuel to the fire. If unchecked, scheduled currency inflows may be delayed. This can make the country extremely vulnerable to external shocks.
Pakistan is at a critical juncture in terms of relations with its bilateral financial partners and international monetary institutions. All stakeholders need to focus on these serious economic issues rather than dilute their energies in political battles.
Abdul Rauf Shakoori is a US-based corporate lawyer
Huzaima Bukhari is a High Court Advocate and Adjunct Professor at Lahore University of Management Sciences (LUMS)