Nobody can argue that the economy looks broadly better than it did a year or so ago. That’s partly because Covid dragged it down and now even a moderate advance would be a big improvement on paper, of course, but the fact is that the Pakistani economy had been suffering since long before the pandemic. So there is an element of forward march in it, which made the experiment with the expansionary budget possible in the first place. Of course employment levels are still nowhere near pre-Covid levels so there is considerable downward drag as well and an immediate take off, like the one the finance ministry expects, might not be possible just yet.
Plus we can also expect some strong headwinds from inflation down the road. Such is the nature of our economy that any effort to pump prime exports is bound to run into a higher import bill. And while it might make for good speeches that these imports are good imports because they are going to increase our exports, the point is that they will drill a hole in the current account far sooner than any export cycle is able to offset the losses and the country, and its people, will be the poorer for it. There’s also the ultimately negative effect of some of the incentives that have been thrown at the industrial sector to keep it solvent. All the incentives for construction and automobiles in the form of tax breaks and subsidies, for example, have worked to reduce price and jack up demand, but once that excess demand starts to push up prices and takes inflation to dangerous levels, then who is going to fire early morning celebratory tweets to show off the success of government planning?
Perhaps the greatest danger comes from our unstable exchange rate. Why can’t the state bank bring some clarity to the matter even though everybody, from ordinary citizens to businessmen who depend on dependable exchange rates for their bread and butter, is up in arms about it? On the one had it says our net reserves are the healthiest in history, on the other it is unable to keep a floor under the local currency. Coupled with the bull run in the international commodity market at the moment, and that the stronger dollar makes imports more expensive, which ultimately makes our exports less competitive, we could very well be gripped by the kind of inflation that can become very difficult to shake off by just toggling the interest rate. As things stand, the insensitivity of SBP is adding to the uncertainty about prices in the near future. And the governor is still unmoved, which raises yet more questions. *