THERE are indeed signs that the economy is stabilising. The PSX share index has, for the first time, crossed 100,000 points. The rupee-dollar exchange rate has rema­ined stable over the entire year despite speculation to the contrary. The inflation rate has come tumbling down to around six per cent when even the most optimistic projection was of near double this number. The recurring dreaded current account deficit has turned positive with a spurt in exports and a windfall rise in remittances, albeit with controlled imports.

These are all positive developments. But will this trend continue? Most importantly, if it does will it ignite sustained high growth, or as is the case with many developing countries, will it end up in the low-growth equilibrium trap of macro stability without growth?

While the government has taken full credit for stabilising the economy, these developments are of course not just the result of its efforts. To start with, the slowing down in the rate of inflation is global after the end of Covid-19 which sent consumers on a worldwide spending spree. This decline has also been helped by stable oil prices.

As to the stock market, it is firmly in the hands of a few speculators. And past booms have fizzled out at the same speed as stocks have climbed! In any case, hardly any new companies have been listed on the stock market over the last year.

Even if the economy stabilises, will it ignite higher growth?

The increase in remittances is indeed welcome but the government should beware that amongst its most likely causes is the return of poverty to Pakistan after nearly two decades of its declining, a situation worsened by the current government policy of not fulfilling its commitment to buy wheat at a minimum support price and pushing up rural poverty as prices fell to half this promised price. As growth slows down and subsidies on essential items are removed, unemployment and poverty will rise further and the government will be hard-pressed to find the resources to increase direct income support to the poor.

There is then always the fear that as stabilisation measures kick in and aggregate demand is compressed, the economy could slip into a deep recession. The lull in the housing and real estate market if it collapses could create a vacuum which could push the economy in this direction as the collapse of the housing market had done earlier in Japan and more recently in China. This will push the government into a conundrum, leaving it little room for manoeuvre given the tight fiscal constraints the IMF programme has imposed on it. The government should be prepared for such an eventuality.

On the external front, there are already serious concerns building up of global economic uncertainty as Donald Trump takes office next month. While the dollar will, in all probability, strengthen given his announced trade curbs on imports from China, Canada and Mexico in the first instance, a major trade war can erupt with each economy adopting policies designed to protect its own interests. As in the past, this could trigger a global recession which would hurt developing countries including Pakistan.

We must also remember that despite improvements in our current account balance we are still vulnerable to external shocks. We possess under three months of foreign exchange reserves to finance imports and a significant gap this financial year in the foreign exchange external balance (including debt repayments). Despite high expectations, foreign investment (Saudi Arabia) and promised debt rollovers (China) have still not materialised.

The real question is that even if the economy stabili­ses as it has many times before will it ignite higher gro­wth with poverty reduction?

The targeted 3pc growth for this year is less than half of what the country needs, in view of its population and labour force, to make a dent in rising poverty and malnutrition. Though growth is expected to pick up in subsequent years, it will still be much less than required and much lower than what India has posted (over 7pc) in the last three years.

There are some emerging green shoots (for example, IT and AI) which could serve as drivers of economic growth. But it is already difficult to get our ruling elite to pay their due taxes and well-nigh impossible to get them, or for that matter any foreign investor, to risk investments in the current political milieu. Few can blame them after the recent events.

The only way to get out of the interdependent political and economic dead ends is a political détente, or what former senator Mushahid Hussain has termed a ‘cooling off’ period, in the current confrontation between the major stakeholders. But have we ever learnt from our past mistakes?

The writer is professor at the Lahore School of Economics and a former vice chancellor at the Pakistan Institute of Development Economics.

Published in Dawn, December 3rd, 2024