It is fact that the current
state of the Pakistani economy is miserable. The issue at hand, however, is how
the new government will deal with the challenges of an economy that is almost on
the edge of collapse and global default. Keeping in view the current political
climate in the country, it is more than probable that the new parliament formed
after the 2013 elections, will be a hung parliament, with no solid majority
achieved by any single political party. Therefore, unpopular decisions regarding
the economy will not be taken, even though such unpopular decisions will be the
need of the hour.
Currently, the government is running a fiscal budget deficit that is a whopping
8.5% of GDP, with foreign exchange reserves hovering around US $8.5 billion. The
GDP itself has been growing at around 3-3.5%, just a few percentage points above
the population growth rate. Therefore per capita GDP, in effect, has not
increased. Thus poverty and unemployment have soared in the past few years. The
central bank has been following a loose monetary policy since the past year,
with consecutive and significant decreases in the discount rate in the hope of
reducing the domestic debt levels of the government. The most dreadful aspect is
that of the external debt level and its comparison with the depleting foreign
exchange reserves of the country. With only US $8.5 billion in reserves, the
country is anticipating a balance of payment deficit of around US $3.5 billion,
and is expected to pay-off an installment worth US $ 3.7 billion of the IMF loan
by the end of 2013.
Since unpopular decisions will not be taken due to a hung parliament, it would
be safe to assume here that the fiscal deficit of the government will remain at
dangerously high levels. If the State Bank decides to increase the discount rate
in the hope of controlling the high amount of capital outflows currently taking
place, the already sky-high level of domestic debt will balloon further. Even
though this tightening of the monetary policy will be required to control
capital flight and inflation, it would be detrimental for the government’s
fiscal situation. However, such a decision could be taken by the State Bank if
it acts as an independent entity, separate from the government, rather than as
an extended arm of the Ministry of Finance (as it has been in the last five
years). If the tightening of monetary policy is not implemented, capital
outflows from the country will continue, putting further pressure on the already
depleting value of the rupee.
The free-fall of the rupee will continue, although this free-fall could be
slowed down. Either way, the rupee is bound to lose more value against
international currencies in the coming year. This is because of a net outflow of
capital, depleting reserves, the IMF loan repayment, and a continuously
worsening balance of payment position. The almost certain depreciation of the
rupee will in turn lead to a price hike, especially in sectors that are
dependent on imported inputs. The depreciation of the rupee will also increase
the amount of foreign debt that is to be repaid. Since electricity/gas shortages
and regular shutdowns due to the worsening law and order situation will keep
industrial output low, the country will not be in a position to take benefit of
this depreciation by increasing exports. Thus, the depreciation of the rupee
will hit the already bruised and battered economy hard.
So to sum up, economic projections for the first few months of the next
government are far from decent. A depleting rupee coupled with huge external
debt levels could well lead the economy into global bankruptcy. Domestic debt
levels too will rise, for reasons discussed above. These will leave little
credit for the private sector, further strangling domestic industries that are
already suffering due to power shortages and the law and order situation.
Capital outflow will continue, whether it may be due to a bad investment
climate, terrorism or a low discount rate. GDP growth will remain abysmal, and
may even fall below the level of population growth, increasing unemployment and
poverty. Inflation will remain high, due to rising fuel prices, a depleting
rupee (leading to more expensive imported inputs) and a huge fiscal deficit.
Pakistan will most probably have to request IMF for a bailout package. Foreign
reserves could however increase and the depleting rupee situation could be
avoided if foreign remittances rescue the economy, as they have done in the
past. It is a fact to be accepted that the last five years have done significant
and perhaps permanent damage to the economy of Pakistan, and the road to
recovery will be a long and torturous one to say the least.