It is not as if the latest edition of the World Economic Outlook (WEO) forecasts appeared out of nowhere. The estimates confirm what we already know: the global economy is heading deeper into a stagflationary quagmire in the near term, with the route to recovery in the long term loaded with various adverse risks. The early signs of a gentle landing this year appear to be shifting with the horizon, with all major economies gripped by raging inflation. Recent financial sector shocks are likely to lead to a credit crunch in the future, adding to the global deceleration pressures assisted by the IMF.
Obviously, an unfavourable global economic outlook spells big trouble for Pakistan’s economy, which is riddled with long-term macroeconomic imbalances, battered by natural disasters like last year’s cataclysmic monsoon flooding, roiled by vicious political instability, and burdened with unsustainable levels of public debt.
The WEO is silent on the fact that the Fund’s myopic pursuit of synchronised monetary tightening across major economies as well as developing countries like Pakistan contributed to the world economy’s current low-growth, high-inflation trajectory. Top IMF officials acknowledge that inflation has proven to be ‘stickier than anticipated a few months ago,’ which is equivalent to declaring that at the time, they were unable to fully understand the situation.
On the domestic front, it is fair to argue that the administration has been helpless in the face of the Fund’s insistence on one inflationary policy after another. Any aspirations that Finance Minister Ishaq Dar had for the Fund to be more lenient in the aftermath of last year’s devastating catastrophe have long been crushed. Over Dar’s insistence that the market is distorted by the country’s porous borders with Afghanistan and other market distortions, the rupee has been permitted to fall in line with the Fund’s appraisal of its worth.
The policy rate has been hiked to an unprecedented 21%, triggering a wave of inflation. Prices for petroleum, electricity, and gas have all been raised several times.
Administrative import restrictions have reduced the country’s current account deficit at the expense of sinking import-based trade and industry, resulting in the loss of hundreds of thousands of jobs.
On the other hand, it is also true that the government has slowed the fund for unknown reasons. For example, the same amount of monetary tightening delivered over a shorter timeframe could have lowered inflationary expectations while also allowing a mending of wounds with the Fund in time to create some fiscal room before the current fiscal year ends. Unfortunately, that did not occur, largely due to the government’s dragging feet at every step. Furthermore, the government has done little else to stimulate the domestic economy. All of these interconnected patterns can only lead to the slow growth rate that the fund is now forecasting for FY23. Only given Pakistan’s rapid population increase does 0.5 percent GDP growth equate to real economic decline.
There is little doubt that the minor upturn in FY24, reflected in the 3.5 percent growth rate that the Fund expects Pakistan to achieve, is based not on any constructive policy action by the government but on the sheer resilience of our real economy, which inevitably rebounds back after every setback. The problem is that its fundamental macroeconomic imbalances stymie our economy nearly as soon as it begins to grow, piling up the import bill, increasing the current account deficit to unsustainable heights, and shattering the government’s budget beyond repair.
In any case, Pakistan’s takeaway from the WEO is that the populace must brace itself for the next few years based on its resilience and high pain threshold. Welcome to another couple of years of harsh economic times, arguably the toughest for any Pakistani alive today.
