Pakistan’s Prime Minister Imran Khan’s approval ratings were consistently positive up until recently, demonstrating hope among his supporters and the liberal media that he can fulfil at least some of his campaign promises. With an extremely thin majority in the parliament, now even in his own party, his grip seems to be waning. As the economy nose dives and inflation bites the common man on the street, patience near and far appears to be running out. Today more than the opposition, he himself needs to be sure that his own party stalwarts continue to follow his lead. The term “Seeming Democrat” designates the type of elected official who wins office touting a firm belief in the democratic way of working, but in essence possesses a mindset in line with conservative ideology, refusing to listen to the very forces who propelled him into power based on the core liberal beliefs that defy excessive spending or unbridled borrowing or policies that create undue pressure to increase taxes.
With his government becoming a complete hostage to the IMF and the endless chatter of the presidential form of government, one wonders that could he in-effect be that seeming democrat that economists so often dread! But this is not all. Almost all sane analysts have been quite vocal about his government’s economic policies on the grounds of a real danger of runaway inflation. The worrying fear is that as a follow-up of high inflation could Pakistan’s economy be heading towards an asset crash? While some may argue that devaluation by itself represents an almost 50 percent crash in the real value of national assets and at the same time almost doubling of the national external debt, but perhaps even a bigger worry is that what happens if the market now crashes even in Pak rupee terms—we are already seeing some indication of this in the Pakistan Stock Exchange. When we look at global economic history, Hoover was the US president on whose watch the 1929 stock market crash occurred. Historians have identified excessive borrowing, high inflation and an absence of investment and employment due to excessively high interest rates as the main contributing factors to the 1929 crash that marked the end of the Roaring ‘20s then. A cursory glance at our position today and it seems that things do not seem to be very different than what President Hoover may have faced at the time.
The question then arises: Is it reasonable to enter a punishing fund programme to solve otherwise unsolvable problems? It is in this context that the current measures (mini budget) as announced by the government does not make much sense, because the fundamental risk remains in that will the measures be able to tame inflation and make lives of Pakistanis any easier? Answer: Unlikely. Pakistan’s economic malaise primarily stems from a consistent failure of public-sector macro and micro management and one was hoping that this is where the focus instead should have been. When we study the turnaround story of Bangladesh, this is the main lesson that we learn on how the Bangladeshi leadership effectively used the private sector entrepreneurial juices to unleash efficient public sector delivery systems where otherwise the government was failing, e.g. education, imparting technical skills and employment generation at the poorest of poor pockets through responsible cum targeted micro financing. On the macro front their mantra has remained simple, increase exports by minimizing the state’s footprint, involvement of stakeholders in related policy decision-making and doing away with counterproductive governmental oversight.
The principal global inflationary challenge that has emerged from the pandemic is that of supply chain disruptions and the situation in Pakistan naturally bears no exception to this. Modern supply-side economics seeks to spur growth by boosting labor supply and raising productivity. Sadly there has not been any focus on these aspects in Pakistan now since quite a few years. What one would have liked to see from this government was to demonstrate a resolve in cutting its own expenditure through a reduced role in public sector undertakings and embarking on the long pending structural reforms that loosen the stranglehold of the state on key input deliverables like electricity, gas and energy per se. Also, there seems to be no innovative thinking on checking the embedded trails of smuggling, under-invoicing, mis-declaration and outright blocking of undesirable & luxury imports or a drive to increase the tax base, but what we get is rather the same age-old recipe of coercion and burdening the existing taxpayers by giving draconian powers to the taxman; things that we all know even in the past have done more damage than any good. When it comes to the imbalance on the external account, ironically the amended exchange rules, instability in the currency parity, disrupting market convertibility, and high interest rates are all elements that tend to retard export growth over the long-term and not the other way round. No rocket science in determining that lower taxes, lighter regulations and low interest rates are invariably the fuels in making businesses more competitive, which in-turn unleashes capital investment.
To sum it up, a bit of history to learn from—a recent study documented by Yale Insights points to a historical constant that has always existed and it reveals that high leverage cost, mistrust in the currency’s strength and excessive regulatory conditions were the main triggers of the 1929 U.S. stock market crash. Once the confidence in the economy and businesses wanes and once investment and employment generation stalls, the crisis takes shape. Since, almost all productive incremental wealth is basically tied up in assets and if the underlying international value of such assets starts to tumble, nobody remains secure including the government. And with COVID-19 still creating havoc and climate change more and more visibly aggravating its effects, the problem of inflation we should be most worried about is the verbal inflation of experts who believe their discourse is capable of shoring up a failing system.
The writer is an entrepreneur and economic analyst.