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Important macroeconomic challenges

Pakistan needs a homegrown reform policy that takes strong radical and creative decisions about political economic issues, and balances monetary and fiscal policies, and for that it would have been better to bridge macroeconomic imbalances by least International Monetary Fund (IMF) intervention and through other lending facilities even if a higher cost of borrowing was to be fulfilled. This is because at least policy would have been homegrown and according to Pakistan’s indigenous needs. That is the ‘naya’ (or new) Pakistan one wanted, not the same old approach of going to the IMF in the wake of a balance of payments crisis.

Having said, both the Ministry of Finance and State Bank of Pakistan (SBP) should have managed float better since many months now, since inflation pass-through is high on account of both oil prices and exchange rate. This much rupee appreciation against the US dollar should be unacceptable to Pakistan for many months now. Moreover, for controlling speculation in the foreign exchange market required inclusion of better institutionalization and regulation, while at the same time SBP should have made appropriate intervention in foreign exchange market, along with making forward buying of dollar to create a buffer to smooth exchange rate at a much lower rate. On the other hand, the government knowing the precarious current account situation should have brought about aggressive policy response for export expansion, and bringing institutional reform in the stock exchange and foreign exchange markets. Yet nothing much has materialized on both these counts.

The current spike in the already depreciating value of the rupee will bring in another upward push for inflation, which was after very aggressive monetary policy – the most intense in Asia since over a year now – finally showing some signs of coming down. Hence, because of this the investment and growth sacrifice in effect due to this tight monetary stance is also likely to be nullified with this rate appreciation; rising also in recent months at the back of stronger than expected economic growth and employment outlook of the US, in turn bringing greater future demand for dollar, and increasing its value for PKR further. That may adversely affect our already difficult current account situation, especially with renewed surge in oil price in the recent months; especially in the wake of weaker oil supply due to: a) less than anticipated supply by Saudi Arabia; and b) the US sanctions against Iran and Venezuela denting their chances to supply any significant quantity of oil.

At the same time, rising prices of oil since last December will put further pressure on inflationary spiral. It is important therefore to reduce further and by a lot, the indirect taxes/levies component in the landed oil prices to the public. On the contrary, GST has been increased significantly on the petroleum products recently!

There is evidently a strong fiscal policy and governance/regulation element missing in our economic policy to tackle inflation. Also, novelty from our policy is absent as some important prescription is available on the side of unconventional monetary policy, whereby rather than persisting with aggressive monetary policy to curtail aggregate demand, and instead printing money and destroying excessive money by varying rates of taxes. This having the advantage that printed money could be used to reduce both the burden of domestic debt, finance social/welfare spending, and injecting a portion of it in implementing capital formation under targeted public investment projects; even of the nature of public-private partnership.

This would also allow government to take more control – through greater involvement of fiscal policy and bringing a balance, in turn, by bringing much needed reduction in the role of aggressive monetary policy – of dealing with not only such economic issues as inflation, but also boosting aggregate supply with positive consequences for investment, employment and economic growth as well.

As many developed countries – for instance Japan and the US over the years – have struggled to prop up inflation and at times deflation in the case of Japan, the unconventional policies have had mixed outcomes. So hence even zero or negative policy rates have not worked much. This also has brought into attention New Keynesians and the role of fiscal policies. Therefore, the role of institutional, behavioural – economics and finance – and political economy have been re-emphasised, and should also hold importance for tackling economic crisis in Pakistan, where conventional economic policy has more often than not left the country in a stagflationary situation.

So while conventions of mainstream economics informed policy that a reduction in aggregate demand at the back of tight monetary policy although will require sacrifice of employment (along with in turn investment and economic growth as a consequence), but will deliver reduction in inflationary pressure, yet as long-term economic data of Pakistan indicates, instead both inflation resurfaced or remained downward sticky even in the wake of policy rate hike. So, while employment, growth and equity concerns were compromised, still inflation did not respond much to an aggressive monetary policy. This indeed lays the basis for borrowing from unconventional economic policies of the nature that balance the role of public and private sectors, along with monetary and fiscal policies.

At the same time, the lack of success of Neoliberalism/ Washington consensus policies meant that over time the role of leftist/social democratic policies has been re-identified as useful in the West. In turn, the surge of political parties across the western hemisphere that have adopted some brand of socialism have emerged. The role of state has indeed been emphasised in markets and regulation of the corporate world. Inequality at the same time is being seen as an endogenous factor to growth, even within IMF thinking. Resultantly, the whole debate on globalization is being approached with the lens of justice, equity, democracy and climate change concerns.

This global context of economic situation and the role of unconventional policy hold linkages and lessons for a developing country like Pakistan; after all ever increasing financial globalization means that economic ripples produced at one place can soon be felt at another – the recent impact of oil price shock and stronger US dollar on Pakistan are important example in this regard. This also means that the applicability of policy tools has more universal commonalities now than ever before. Therefore, learning from above should bring some inclination to bring back the role of government in markets, including the foreign exchange markets.

Having said, this will be hard to do in a neoliberal programme negotiated with the IMF, which asks for virtually non-involvement of government in real, monetary and foreign exchange markets. Unfortunately, the IMF appears reluctant to learn from the changing economic research and realities globally, in turn at the cost of bringing greater misery to the masses of the recipient countries of IMF programmes. More importantly, the government also remained quite muted in bringing such thought process neither at the negotiating table with IMF, nor reflected it enough in its own policy formulation effort over its tenure. We are indeed heading for yet more stormy economic weather, which would test the economic policy of this government even more.

Dr Omer Javed, "Important macroeconomic challenges," Business Recorder. 2019-06-04.
Keywords: Economics , Homegrown reform policy , Foreign exchange markets , Stock exchange , Fiscal policies , Macroeconomic imbalances