There is some impression gaining ground among analysts that the maximum economic stress is behind us, at least for a brief period as frequently witnessed in the past in absence of structural reforms and sustainable economic growth.And there is also a growing view that prices have hit a level where these are expected to stabilise. And the State Bank of Pakistan’s (SBP) average inflation rate forecast remains unchanged between 18-20 per cent for the current fiscal year despite the higher rate of inflation recorded over the past two months.

With a sharp drop in imports in July and the reduced current account deficit, the central bank on August 5, reversed the cash margins on imports from 100pc to 25pc and in some cases to zero. But the government ban on imports was not lifted as stipulated.

Finally, perhaps no less important, the concerns of local markets about a further tightening of monetary policy owing to high headline inflation seems to have been mitigated by two different statements of the Acting SBP Governor Dr Murtaza Syed.

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“We do not have to create an economic recession to bring inflation down and real positive interest rate can be achieved in the long run,” said Dr Syed in an interview with an English daily. This is not in tune with the International Monetary Fund (IMF) prescription.

Pakistan’s politics are highly partisan, with little cooperation or compromise between the government and parliament — the role of the military is seen as a guarantee of stability but is also criticised for undermining civil governance capacity

While reiterating that the rupee would not be managed artificially, he made it clear in another media talk that “speculators could not be allowed to do whatever they want to do. The central bank would remain vigilant in taking action to stop the disorderly movement of the exchange rate.” Some steps have also been taken in this direction.Earlier local markets were concerned that further policy tightening measures could lead to a recession.

After two years of 6pc economic growth, Dr Syed said “we can afford to slow down the economy but we can not slow it to the point where there is a danger of recession.”

Similar views about the US interest rate outlook with risks of recession have been expressed lately by the US Federal Reserve. In fact, famous economist James K. Galbraith argues that tightening US monetary policy (MP) will inflict social and economic harm with little or no payoff.

But Dr Syed’s approach seems to be somewhat different. In an article on Dr Mahbbub ul Haq’s vision and insights, he recalled that his mentor had argued that the mythical force of demand and supply does not work when people are shackled by low purchasing power or a handful of monopolists. Dr Syed takes pride in acknowledging that “ Dr Mahbub taught me all I know about economics that is ultimately worth knowing.”

President of Punjab Bank Zafar Masud described Dr Syed’s observations about MP ‘as a significant step in the right direction. Mr Masud, who was involved in monetary policymaking in the recent past, says monetary measures should be pegged with the ‘most stable inflationary number’ or core inflation index that excludes high volatility commodities such as food and energy that have been hit by the global supercycle and supply chain issues and a surge in administered utility prices at home.

The headline inflation is 25pc which is more than double the rate of core inflation of 12pc

Today, the gap between the headline and the core numbers is perhaps the widest, with headline inflation of 25pc — which is more than double core inflation of 12pc. For long the monetary policy was anchored on core inflation before being abandoned under IMF’s ongoing stability programme.

Pakistan needs to move towards an inflation-targeting framework focused on core inflation that will benefit the economy more holistically, says Dr Masud. Thus he believes that markets will have greater transparency and confidence in SBP’s policy actions.

Referring to unsustainable and unaffordable imports, Finance Minister Miftah Ismail told the Karachi Chamber of Commerce and Industry that Pakistanis should live within their means and in a dignified manner instead of asking for loans. “If we have exports of just $30 billion, then we should not import as much (as we do). If we do not have products to sell to the world, we should not buy things from it either.”

While recognising the need for balance in trade, analysts and economists note that imports are a complex problem in Pakistan. Exporters also favour imports as they use reportedly over 30pc of imported constituents for their exportable goods. They say the government also does not want exports to fall by slashing imports.

The key issue here is that the country has not been able for decades to produce enough goods and services to meet its domestic demand particularly fuelled by surging workers’ remittances (WRs). However, the $31bn WRs in 2021-22 do play a crucial role in financing the current account deficits.

The country’s economic model is too reliant on consumption, which accounts bulk of overall output while investment and exports make up 15pc and 10pc, respectively. As a result, Dr Syed says, the country runs a perennial current account deficit. This leaves the country at the mercy of foreign savings.

The acting SBP governor recalls how Dr Mahbub ul Haque pioneered the paradigm of human development and with it the vastly influential human index which looks beyond GDP to capture other vital dimensions of human well-being — such as decent education, good health, political freedom, cultural identity, personal security, community participation and environmental security.

Hybrid democracy is also identified as a major hurdle in economic progress. According to European Union’s Multi-Annual Indicative Programme report on Pakistan for 2021-22, politics is highly partisan, with little cooperation and compromise solutions between government and parliament. The role of the military in politics and administration is seen as a guarantee of stability but is also criticised for undermining civil government’s governance capacity.

In absence of real accountability of elected representatives by voters in free and fair elections, a hybrid democracy provides the space for dynastical politics. In fact, they are political twins.

Getting the basics of the economy right is important but there can be no boilerplate solutions for achieving them that can simply be imported, says Dr Syed, and adds, that local realities must be kept in mind.

Published in Dawn, The Business and Finance Weekly, August 15th, 2022