I see food inflation, economic repression and social unrest in the next six months – This is an easy question to pose, but a hard question to answer as a financial economist/banker. In my humble opinion, there are too many players (USA, Russia, Saudi Arabia, UAE, China) involved in this region who don’t want Pakistan to go down economically. The recent monetary statement of the SBP indicates, that targeting inflation is high on the Central banks agenda. I see food inflation, economic repression and social unrest in Pakistan in the next 6-months. Depreciating currency will lead to inflation which is happening again at the moment when Pak Rupee is trading at Rs90 against the US Dollar (losing 3.4 per cent against the Dollar in a week’s time). I don’t see any political maturity in the leadership with neither a farsighted approach nor brinkmanship to deal with international players tactfully. However at this crucial juncture, hats off to our military leadership led by Gen Ashfaq Pervez Kayani and his men who have again displayed strategic leadership, integrity and foresight to deal with the imbroglio we found ourselves stuck in.
Pakistan will be making payments to IMF in 2012. 25th January is an important date when the government will make $800 million as the first payment. The Pak rupee will continue to bleed going forward. Those present government had not really given the strategic focus to the economy that was required when they took power in March 2008. It was very disappointing to see that they had considered the wrong strategy from the start. GoP adopted an expansionary fiscal policy which did not increase the GDP size, increased budget deficit, increased poverty levels, depreciated currency, unabated printing of money/QE, facilitated corruption, lowered purchasing power, projected negative real interest rates, lowered confidence in the economy, debilitated the living standards of the people and above all tarnished the image of the country.
Capitalism is like a bicycle. Any child can easily ride a bicycle forward. No one has ever ridden a bicycle backwards. Capitalism only works well in a growth government. It does not know how to cope with an economic environment of low or negative growth.
If we analyse the economic situation of Pakistan in the last 5-years, World Bank, and SBP reports indicate that GDP growth rate decreased from 5.7 per cent in 2005 to 2.3 per cent in 2011, and inflation climbed from 11 per cent to 27 per cent. During the same time, the external debt witnessed a gargantuan increase of 24 billion dollars and poverty levels deteriorated from 35 per cent to 60 per cent. This situation is alarming to say the least.
The above figures clearly illustrates that Gilani and Zardari government have added misery to the woes of the people. Poverty levels are rising (increase of 71 per cent). Government debt has risen (rise of 63 per cent) considerably. The question is what is the marginal productivity of debt to GDP growth in the last 3-years? Negligible. Government has wasted its resources on valueless projects, with rampant corruption amounting to Rs1.7 trillion per annum and above all have actively taken steps to destroy state institutions like PIA, Railways & WAPDA. So the billion dollar question is can we turn the tables in our favour? We can follow two strategies for the next 18 months.
Government should adopt McKinsey style spending which is valuable for the economy. Canadian government adopted similar strategy from 1994 -1996. We can look up to them for economic guidance if we are missing out on the strategy paper at hand. Pakistan’s government should not waste funds on expenditure where employment generation, productivity enhancement and GDP growth are not happening. GoP should strategise its policies on value addition projects going forward to boost economic productivity and to enhance living standard of the masses.
In an economy where government is monetising its budget deficit by printing money, poisoning the financial system, tax increase like VAT or RGST is not the answer. Economic success stories of Late Milton Friedman — Nobel Laureate from Chicago School and Adviser to President Reagan, USA, advocated tax cut and sustainable government spending that pulled the US economy out of recession. We need to study those successful models. Prudent economic policies, educating females, cutting down on spending and effective monetary policy can provide Pakistan an impetus to revive the ailing economy. We are at that juncture in economic history, where international economics and political relations are an important new way to integrate globally in a positive way.
Shan Saeed is a financial market economist and commodity expert with 12 years of financial market experience. He is a graduate of University of Chicago and IBA. He can be reached at saeedshan@gmail.com and blogs at www.economistshan.blogspot.com