There appears to be growing impatience within the government over the ongoing economic adjustment and a desire to somehow accelerate growth.
The itch is growing with the realization that the surest way to break the Imran Khan fever plaguing voters is to deliver rapid economic growth, at least for a few years. But how do we do this?
Pakistan has used domestic and foreign liquidity injections to generate short-term growth spurts in the past. Liquidity from abroad comes in the form of direct investment and debt, with some support also coming from steadily increasing remittances and exports. Three separate growth spurts were designed using liquidity injection. One lasted from approximately 2002 to 2007, until a terminal crisis in 2008. The second one lasted from 2014 to 2017 and reached a terminal crisis in 2018. And the third one lasted from mid-2020 to 2021 and then reached a terminal crisis in 2022.
Each of these had liquidity injections as the main driver. First of all, it was the post-9/11 inflow of funds from a variety of sources that far exceeded the $12 billion in American funds raised between 2002 and 2008.
In the second case, in 2014, the inflows occurred in a very short period of time within a few months. Saudi Arabia’s $1.5 billion in deposits, $2 billion in free float in Eurobonds and undisclosed government commercial borrowings were rolled over. Oil payments came due and $500 million in communications spectrum auctions suddenly increased reserves within weeks.
Combined with a sharp decline in the current account deficit under the auspices of IMF programs and large capital inflows from the World Bank and Asian Development Bank, these months of the first half of 2014 brought one of the most significant improvements in the external sector outlook. I recorded it. It was the first time I had seen this country in decades. “Pakistan has not experienced such a series of positive developments in the external sector since the end of 2001,” the National Bank said in its third quarter report this year. This was before the CPEC-related inflows started.
The third major liquidity benefit came from the pandemic. The pandemic turned out to be more of a boon than a liability for the government, just as 9/11 was a tragedy for most but a bonanza for the then incumbent government of Pakistan.
Effective immediately, the ongoing IMF program was suspended, freeing the government from accessing the fiscal and foreign exchange buffers it had painstakingly built under the program since July 2019. Added to that was $1.4 billion in immediate emergency spending, as well as a large influx from Japan. Debt restructuring by the World Bank and the Asian Development Bank has significantly reduced the burden of debt service costs.
We can see the same reflexes that drove previous liquidity-driven growth booms starting to emerge.
The sources of liquidity inflows were diverse in all three cases, but relied heavily on bilateral funds as well as concessional funds from the Bretton Woods institutions. How the government took advantage of these inflows was common to all three episodes. They slashed interest rates, keeping the exchange rate artificially low while increasing government spending, including amnesty programs, subsidy loans from state banks, and even special energy subsidies for “export-oriented industries.” Announced “special incentives” for investment activities. .
In both cases, the result was that idle capacity that had sat idle during the previous economic adjustment period suddenly came to life, and a growth spurt began almost immediately. In all three cases, growth began within a few months. And in all three cases, growth was stalled by the very same deficits that drove their predecessors into balance of payments crises.
In both cases, large liquidity injections were made to accelerate growth. This had two important consequences. Liquidity accelerated inflation on the one hand and trade deficits on the other, leading to the depletion of foreign exchange reserves and a sharp rise in the current account deficit, followed by a return to a balance of payments crisis amid high inflation. There were no exceptions. Every growth spurt ended the same way.
Once again, we can see the same reflexes that drove the initial liquidity-driven growth boom starting to emerge. For example, there is a desire to use the rebuilt foreign exchange reserves to lower the dollar price.
For example, just over a month ago, Deputy Prime Minister Ishaq Dar took advantage of the opportunity to speak at the Pakistan Institute of China Studies to argue that the real value of the rupee should be below 240 to the dollar. His remarks caused a lot of controversy and brought back memories of August 2022. At the time, he used similar statements to oust the then finance minister and replace him with himself in a futile effort to lower the exchange rate.
But beyond Mr. Dahl’s dubious economics, there is a growing thirst for liquidity within the government as the effects of prolonged economic stagnation under the IMF program begin to take hold. Industry is calling for a rapid reduction in interest rates, and ministers have expressed similar sentiments. The prime minister’s repeated visits to Saudi Arabia are also an attempt to extract financial aid from Saudi Arabia, but so far no results have been achieved.
As time passes, the temperature will increase. Some signs along the way could relate to whether they decide on unscheduled eurobond movements in mid-year, or whether the discipline to keep development spending within targets begins to wane. Pakistan has never experienced a growth episode that was not triggered by foreign liquidity injections, and there is no reason to believe that is about to change anytime soon. The hearts and ideas of the rulers of this country cannot exceed this.
The ongoing economic adjustments under the latest IMF program will lose support at an accelerating pace in the coming months. However, the foundations for a growth recovery are not yet in place. And therein lies a big problem.
The author is a business and economic journalist.
khurram.husain@gmail.com
X: @khurramhusain
Published at Dawn on December 12, 2024
