In November, annual national consumer inflation in Pakistan rose to 29.2 per cent from 26.8pc in October, mainly due to increased gas and electricity prices.

Average yearly inflation during the first five months of this fiscal year (July-Nov 2023) stood at 28.6pc. Further hikes in energy prices are on the cards amidst the International Monetary Fund’s (IMF) dictated reforms in the electricity and gas distribution sectors. Containing inflation for the full fiscal year within the range of 20-22pc as projected by the State Bank of Pakistan (SBP) at the beginning of the fiscal year seems almost impossible, more so if the central bank opts to ease its tight monetary policy.

Analysts expect the central bank to leave its key interest policy rate unchanged at 22pc in its meeting on December 12.

Incessant hikes in electricity and gas prices and high-interest rates are taking their toll on industrial production. Large-scale manufacturing (LSM) grew 0.93pc in the first quarter of this fiscal year (July-September 2023), details of the first-ever published quarterly GDP growth show. Earlier, the Pakistan Bureau of Statistics had reported LSM growth of just 0.68pc in July-September. Overall GDP, by the way, expanded by 2.13pc in the first quarter.

The next elected government may face challenges in continuing reforms

Almost all industries now find it too difficult to survive in the high inflation, high-interest rate environment. Earlier this month, 80-90pc production units of different sectors, including those belonging to export-oriented industries, suspended operations in Karachi for a day to protest a gas tariff hike.

Output of some of the LSM sectors fell sharply in July-September. Production of textiles, the mainstay of exports fell 20pc. The output of automobiles, the driving force of banks’ consumer financing, plummeted 46pc.

Little wonder then our merchandise exports refuse to rise. In July-November 2023, export earnings of $12.172bn were just 1.93pc higher than those of July-Nov 2022.

Sluggish growth in LSM and exports may remain problematic throughout this fiscal year. Neither the present caretaker government nor the incoming elected government after the February 8 general elections can do much to boost industrial production and exports.

The reason is simple. The majority of industrial firms cannot expand production, and the majority of exporters cannot enhance export earnings unless they get cheaper gas and electricity and cheaper bank financing.

Decades of pampering plus structural economic and sector-specific problems kept most industries and exporters dependent on subsidies and special treatment. Only a few of them used those subsidies to invest in productivity and efficiency enhancement. Although they, too, feel the pinch of high inflation and elevated interest rates, they continue to grow even in this tough economic environment.

Decades of pampering plus structural economic and sector-specific problems have kept most industries and exporters dependent on subsidies and special treatment

That said, there is no denying the fact the current wave of energy price hikes is unprecedented and the pace of monetary tightening too fast.

For most categories of industrial users of gas and electricity, effective energy prices went up 100pc — and in some cases even more. And the SBP raised its benchmark interest rate by 700 basis in just seven months — from 15pc effective before November 28 2022, to 22pc on June 27 2023.

Since then, the rate has remained unchanged as repeated energy price hikes, frequent rises in prices of imported fuel oil, rupee depreciation and occasional disruption in food supplies strengthened inflationary pressures, leaving no room for the central bank to consider monetary easing.

Massive energy and tax reforms continue as part of the IMF programme with the hope that they may correct the number one underlying issue of Pakistan’s economy responsible for most of today’s economic issues — lack of fiscal resources.

Domestic revenue resources are so low that borrowing foreign funds becomes critical. Accumulation of further external debt, in turn, enhances debt servicing requirements and that, in turn, forces Islamabad to borrow even more foreign funds to clear old debts.

Now, even this has become too difficult. So, policymakers continue to seek rollovers of debts acquired earlier from friendly countries. Only recently, Saudi Arabia rolled over a $3 billion debt for one more year to help Pakistan see its foreign exchange reserves evaporating.

Finding a way forward for industrial revival and export growth isn’t easy under the present tough economic conditions. That is why we see the caretaker government taking some bold and potentially controversial measures to reduce the size of the energy sector’s circular debt, increase tax collection and prepare grounds for attracting huge foreign investment from the Gulf Cooperation Council region — all with the apparent backing of the army.

The next elected government may or may not dare question the nature of these measures for obvious reasons. But will these measures yield the desired results in due course of time? That’s a million-dollar question.

Even if the next elected regime follows through all these reforms, this factor alone cannot guarantee that the outcomes will be productive and in line with the underlying objectives.

Several other factors may have a big impact on these reforms during their long course of implementation, including civil and military ties and the level of political stability within the country, ups and downs in Pakistan’s relationship with the IMF and the West, change in geopolitical environment and the level of accountability and transparency (or lack of both) in the reform processes.

Published in Dawn, The Business and Finance Weekly, December 11th, 2023