As Pakistan faces a growing current account deficit, questions surrounding its pace of economic growth and its inability to protect households against rising inflation have once again appeared on the horizon.
Is Pakistan surrounded by yet another economic bubble that could burst in the not-so-distant future? It’s the conundrum at the heart of Pakistan’s economic outlook as Imran Khan’s government patts itself on the back, predicting a turnaround for a besieged economy.
More than three years after the Prime Minister and his Pakistan Tehreek-e-Insaf (PTI) came to power in Islamabad, armed with promises to create a “naya” or a new Pakistan, there is a sense of déjà vu all around. Driven by Pakistan’s economic history, marked by periods of rising prosperity followed by an uncomfortable downturn, the writing on the wall is hard to miss.
Such periods of prosperity have often affected only a few. The State Bank of Pakistan (SBP) on Monday raised interest rates by a meager 25 basis points, or 0.25%, amid recent pressures on the rupee which triggered an erosion of the Pakistani currency against foreign currencies, especially the US dollar. The policy change that raised the SBP benchmark interest rate to 7.25% gives little comfort to Pakistan’s majority population, at least for now.
There are two visible risks surrounding the economic trends of the country, notwithstanding the claims of “sub acha” or all is well.
On the one hand, the widening international trade gap that fueled a growing current account deficit was caused by the rapid increase in imports as opposed to Pakistan’s exports. The gap has been fueled in part by luxury imports such as automobiles and cellphones – to name just two widely cited examples.
Meanwhile, there is no guarantee that rapid import growth can provide a boost to Pakistan’s future exports – a widely touted formula that has repeatedly failed. An unfortunate result of this trend has been the recent decline in the exchange rate of the Pakistani rupee against the US dollar as importers scramble to buy stocks in foreign currencies on the open market.
On the other hand, the facade of prosperity, as manifested in the rapid arrival of consumer goods, creates the risk of obscuring the downside risk surrounding the Pakistani economy. The most visible risk concerns the continuing failure of the Khan government to ensure an adequate supply of food at affordable costs for the population. Since Khan’s government took control, many people have increasingly bemoaned the continued increase in the prices of essential food items.
Beyond these two extremes – a growing current account deficit and the plight of ordinary people – there has been little movement to reform the state institutions that are at the heart of the economy.
In recent days, the announcement of tougher punitive measures targeting tax evaders has been a powerful reminder of a story all too often seen in the past, when promises of tough action against tax evaders were ultimately unsuccessful. In addition, Pakistan’s pool of potential investors has already shrunk, as many business owners apparently retreat from investment frontiers following open promises of anti-corruption investigations by the National Accountability Bureau ( NAB).
The bubble in its latest manifestation was built on fancy notions such as the promise of rapid growth in the construction industry, aided by pie-in-the-sky type projects, such as the creation of a new town just outside Lahore. Construction incentives have been fostered by controversial measures such as the Khan government exempting investors from disclosing their sources of funds / income. It is a deeply questionable step that has once again opened the doors to money laundering for the wealthy, who are likely tax evaders, in Pakistan.
The bubble may be intact for now, but Pakistan’s economic history students have good reason to be deeply skeptical about the way forward.
The writer is an Islamabad-based journalist who writes on political and economic affairs.
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