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2019 Will it still be the year of yearning?

  • Khaleeq Kiani
  • May, 2019
  • 230
  • Economics viewpoint


Here are two things you might already know. As Pakistan prepares for life outside the Kashmir kink, there have been repeated warnings of economic neglect. Despite this, things could be fairly good in the future for an economy which has banked on loans over the past year, fighting back to regain the day of deliverance.

Before that day the economy has already slowed down, the rupee has been devalued, interest rates have gone up and there has been some increase in the rate of inflation in the country. Why has this happened? And what prospects does the economy hold in 2019?

Pakistan’s economy is recovering from what can be best described as a ‘consumption-led’ growth period that was financed by short-term debt instruments and a stifling of investment climate. Consumption as percentage of the gross domestic product (GDP) went up from the already worrying figure of 91.8 percent in 201414 to 94.5 percent in 2018. Correspondingly, the total gross investment (that includes government investment, as well) was reported at just 16.4 percent of the GDP this year.

India’s figure stands at close to 30 percent and that of Bangladesh is at 31 percent of the GDP.

To begin with, we saw a very clear worsening of the economy’s fundamentals as the country left the last International Monetary Fund (IMF) pro-gramme in 2016 and all forms of fiscal and monetary discipline were abandoned. What this means is that we were increasing growth in the economy by spending from resources that we hardly had. For instance, in the past financial year alone, Rs. 1,300 billion of government spending was financed by printing money and monetisation of public debt.

Now let’s have a look at the monetary side. In the first four years of the former government, the Real Exchange Rate (the buying power of the currency in comparison to other currencies) appreciated by 28 percent without any improvement in the trade deficit to justify this increase. This means that our exports became that much uncompetitive in the international markets and we began subsidising our imports. This led to the closure of hundreds of export houses and fuelled a largely consumption led increase in our imports. From a point where we had a current account deficit of just $2.5 billion in 2013, the figure soared to $19 billion in 2018.

The second aspect of monetary policy is interest rates which were kept low in the past but that also never translated into any notable increase in private sector borrowing, the loans that our entrepreneurs use for investments and setting up businesses and industry. The reason that the private sector was never advanced these loans by banks is that the government was doing what economists call ‘crowding out’ the private sector. The banks were more than happy to lend to the government in the form of treasury bills. So in effect, the lower interest rates actually never led to any investment and the whole monetary scheme of things further fuelled the consumption spree.

So what has the new government done about this? And what does it plan to do to make sure that history would not repeat itself?

The first and foremost plank of the new government’s economic priority in 2018 has been that the country must meet its financing obligations in terms of debt repayment due this financial year ($9 billion) and that the current account deficit is reduced to the range from $11-13 billion from the current $19 billion. The fiscal side also has to show improvement as the last reported fiscal deficit of 6.6 percent is unsustainable. The above priorities are necessary and overarching to keep the economy functioning and never defaulting on its both external and internal obligations.

Yet, the new government’s successful foreign policy has led to friendly countries offering us sizeable support for our balance of payments. Bilateral assistance in the form of funds and deferred oil payment facilities from Saudi Arabia, the United Arab Emirates and other countries has begun to pour in. As a result, the country has successfully averted the balance of payments crises and all economic trends indicate that our deficits are coming down rapidly to within manageable ranges.

Courtesy of Dawn

Khaleeq Kiani is a Dawn journalist for over two decades

Mr. Kiani’s original contribution was re-compiled and re-edited.


banked on: depended on

crow about: to cry out or brag about

dwindling: becoming small or diminishing

kink: problem or impasse

the day of deliverance: the day of being set free


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