WORDS only matter when they are spoken at the right time. And for too many years now, the World Bank has been saying the right thing but at the wrong time. It is hard to get this thought out of one’s mind when reading through their latest Pakistan Development Update (PDU).
The document rightly points out that Pakistan is emerging from a period of extreme volatility, and a fragile stability is only just beginning to strike root. Its projections show that growth will remain subdued for at least another two years, and inflation will remain high even as it comes off its peak.
Stop for a moment to think about this. Pakistan is indeed emerging from a period of absolutely historic volatility that saw the country teeter on the edge of default twice, first in the summer of 2022 and then again in the summer of 2023. It saw inflation skyrocket to a historic 38 per cent in May of 2023. The same period saw the most troubled IMF programme Pakistan has ever had, with three false starts. Through this period, the country saw four finance ministers come and go, with each one blaming his predecessor for leaving behind a mess.
I cannot recall another period quite like this. Things were bad in the late nineties, with sanctions and a coup. They were bad in 2008 with a rising arc of terror attacks and the approach of the Great Financial Crisis. But still, nothing quite compared to the volatility we have just started to emerge from.
How good a job do the PDU documents do of alerting the reader to the fact that the economy is pregnant with ferocious pressures?
Having noted this, let us ask a simple question. If we go back and read the World Bank’s PDU documents from 2021 onwards, when this volatility began, how good a job do they do of alerting the reader to the fact that the economy is pregnant with ferocious pressures that can unleash the most epic volatility the country has ever seen?
The volatility began in May 2021 when the exchange rate started to come under pressure and important inflation readings began to burst their confines and show up across a broader range of goods. Both these trends accelerated from that month onwards to reach historic proportions by May 2023.
Yet reading through the PDU released in April 2021, you get no idea that the economy teetered on the edge of a storm. It is true that the pandemic continued to cast its shadow in those days, but the signs that the economy had been pumped far beyond its ability to bear were all there. The central bank had pumped a monetary stimulus which the report says equalled 3.8pc of GDP, but would later grow to nearly 5pc of GDP. Money supply growth was like a runaway train at that time and the fiscal equation was in severe disarray as the government focused more on handing out goodies under the cover of a Covid stimulus.
Yet the report talks about inflation as if it had already peaked and was set to decline from that month on. It says a fragile stability has been found and the only uncertainty plaguing the outlook is another Covid wave. This was on the eve of the most epic storm of economic volatility Pakistan has ever endured.
In 2022, the bank acknowledged the inflationary tide that had begun to sweep the country, and made its first reference to the “buildup in domestic demand pressures” as a contributing factor and said these were “in part due to accommodative fiscal and monetary policies”.
This was too little, too late. By April of 2022, the economy was already a runaway train and the volatility was sweeping all before its path. This was the time for the government to hear loud and clear, in no uncertain terms, that the failure to rapidly unwind the fiscal and monetary stimulus administered after Covid was giving rise to epic inflationary pressures, and fuelling a malign type of economic growth that was destabilising itself as it proceeded.
That acknowledgement came finally, in October of 2022, when the PDU finally noted that “expansionary fiscal policies and the delayed monetary policy response led to economic overheating”. This was the first use of the word “overheating” by the bank, but it came too late. The finance minister himself had begun to describe the economy as “overheating” in September 2022, so it was perfectly safe for the bank to use the word now. But in truth this needed to have been said at least six months earlier for it to have any effect.
By April of 2023, the bank was beginning to find its voice. The PDU in that year began with these words: “Supported by accommodative monetary and fiscal policies, Pakistan’s economy was made to grow beyond potential in FY22.” Once again, the right words were said, but one year too late. Yet even now, some of the most critical contributors to the volatility were not identified unequivocally. That would have to wait till now, the latest PDU released two days ago.
In April 2024, the bank finally began to say out loud what everyone by now already knew. “[I]nflation pressures increased due to higher domestic energy prices and money supply growth,” says the document. This is the first mention of the words ‘money supply’ in the PDU documents released through the period of the volatility. “[T]he rapid increase in money supply in FY23 continues to exert inflationary pressures,” the document continues, pointing out that broad money grew by 14pc in this period, fed by liquidity injections from the State Bank.
But broad money had grown by 16pc in FY21 and the liquidity injections the bank refers to for the first time this year had actually begun in December 2021. Money supply was a runaway train throughout these years, but the bank could not bring itself to point this out, even as the volatility was sweeping through the economy. They have finally acknowledged that reckless money supply creation lies at the root of the volatility, but it is too little, too late.
The writer is a business and economy journalist.
Published in Dawn, April 4th, 2024
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