The global debt has reached $164 trillion. The amount is nearly 225 per cent of the global GDP. There is a real danger, therefore, of another global financial crisis like that of 2008. Some experts believe that the situation is more alarming than it was ahead of the 2008 financial crisis when the global debt to GDP ratio was 213 per cent. The International Monetory Fund has warned that the peculiar situation presents a huge challenge to the developed economies as well as the emerging ones.
Pakistan is among the countries that could witness a serious economic downturn. The macroeconomic indicators of the country are not encouraging. Inflation, which rose to 8.2 per cent only a month ago, has reached 9.4 per cent. This represents the highest year-on-year hike in prices since 2014.
In its monetary policy statement, the State Bank of Pakistan has identified several factors driving the inflation. These include adjustments in the prices of gas and electricity, increase in prices of food and the depreciation of the rupee. Experts have warned that the higher costs of production, resulting from higher energy prices, and the continuing depreciation of the rupee might keep inflation high.
An IMF report has indicated that the national economy is likely to grow at a rate of 2.9 per cent in 2019 and 2.7 per cent in 2020. Only a year ago, the estimates were 4.7 per cent and 4.9 per cent, respectively. Economists have been saying that what Paksitan needs under the current circumstances is a growth rate of over 7 per cent.
Economic growth has been affected by downward trends in industrial, agricultural and services sectors. The political uncertainty has multiplied the pressure.
Changing the economic situation without taking daring steps will prove difficult not only for the incumbent government but also for the future governments. Even if a short-term solution can be found, the relief will be temporary
A positive development , meanwhile, has been the narrowing down of the current account deficit to $8.8 billion for July 2018-February 2019. The figure last year (for the same period) was $11.4 billion. The foreign exchange reserves have also recovered. However, the fiscal deficit has increased from 2.3 per cent last year to 2.7 per cent this year. The increase, blamed on a revenue shortfall, threatens to aggravate the situation. Economists and financial analysts believe that the government has three options to deal with the situation.
First, the government can bridge the deficit through internal borrowing. This is not a very attractive option and in some countires it is prohibited under law. However, the practice has been fairly routine in Pakistan. (No wonder the domestic debt has reached Rs 3.3 trillion.) If the practice continues, it will seriously affect the monetary policy. It might cause hyperinflation of the kind seen in Latin America in the 1980s and more recently in Zimbabwe.
Second, the government might resort to borrowing from foreign banks, foreign governments, the World Bank and the International Monetory Fund. The government has already said it intends to obtain an IMF loan and that Abdul Hafeez Sheikh, the prime minister’s adviser on finance, will pursue the dialogue. The IMF loan, expected to be between $6 billion and $8 billion may result in an exchange rate risk.
Third, the government might issue new bonds and add to its rupee borrowing.
The IMF is expected to agree to a loan arrangement. However, it is going to be very difficult to solve the economic problems without structural reforms. Appointing a new finance minister (or adviser) might not serve the purpose unless a new economic framework is designed and strategized.
Changing the economic situation without taking such daring steps will prove difficult not only for the incumbent government but also for the future governments. Even if a short-term solution can be found the relief will be temporary. The government will do well to consult academic researchers, independent think tanks and policy institutes on policy reforms. Moreover, the government needs to have an inclusive and consensus-based approach. A stable economy is needed not only for socio-economic and socio-political development but also for national security. As Robert McNamara once said, “Security means development. Without development, there is no security.”
The writer is an MPphil scholar in economics at the International Islamic University, Islamabad. He can be reached at [email protected]