Sudden appreciation
It is strange that the IMF suddenly believes that Pakistan is within reach of ‘significant further economic progress’, but also warns of one pitfall too many that might quickly derail such ambitions. And since these warnings are about high public debt, low tax collection, chronic energy shortage, problems with business climate indicators, etc, it doesn’t seem that better times might be around the corner just yet. True, inflation is lower, the deficit is better, and growth might well exceed four percent this fiscal. But to expect these headwinds to dissipate suddenly, especially within the outgoing fiscal, might be banking too much on the country’s ‘ability to grow’.
The Fund’s take on the monetary policy is no less interesting. Advising prudence going forward, it appreciates decreased government borrowing. But since the ‘decrease’ is only a marginal step back from complete domination of the money market, does it really ensure that the private sector will no longer be crowded out like before? Considering some of the headlines of the past few weeks, which indicate that the government intends to roll over trillions in domestic debt, while contracting fresh loans, such assumptions become questionable. And since investment will directly impact investment, a lot remains to be seen.
Cheap oil no doubt provided an appreciated bid to the economy, yet the requisite 5-7 percent growth band will remain elusive for some time to come. Also, oil might even turn as suddenly as it dropped. Should Greece ditch the euro, the dollar will appreciate, as will dollar-denominated commodities. In the worst case scenario, gross importers like Pakistan will have little to show at the end of the ride. The overall economic outlook, therefore, remains fragile. Granted, growth is up a notch and the deficit a little less discomforting, but the present position is not sustainable for long. There are too many ifs and buts in the IMF’s calculations. It would be best to address the weakness first.