As the ongoing crackdown on currency and commodity hoarding and smuggling remains in the news, rising fuel and energy prices, with their fallout across all sectors of the economy, continue to hurt people and businesses alike.

People continue to lose jobs or remain jobless at a time when national headline inflation is still at 27.4 per cent, and making both ends meet has become too difficult even for those who still find paid work. For large-scale industries whose output is down, the main issue is not just rising fuel and energy prices. They are also struggling because of the International Monetary Fund (IMF)-dictated withdrawal of energy and interest rate subsidies.

Many firms in several sectors are running into losses or making too little profit to be able to increase employment or even retain a full workforce. Small-scale industries fight for survival amidst ever-rising fuel and energy prices and falling aggregate demand.

That leaves little scope for growth in the services sector as it relies heavily on expansion in industrial output and a rise in aggregate demand in the economy. Banks are an exception, though, in Pakistan, as the bulk of their income comes from lending to the ever fund-hungry government.

Regardless of the promises about economic turnaround, growth during this fiscal year will be too little to lift millions out of poverty

That’s why they are still doing well). All hopes remain pinned, therefore, on the agriculture sector. If this sector that shares relatively less burden of taxation in the economy may perform as per policymakers’ expectations, it would be good for the economy. Immediate inflows of some foreign investment into agriculture may also help it.

While announcing its monetary policy last week, the State Bank of Pakistan (SBP) also said that the outlook of the agriculture sector has improved. The central bank left the interest rate unchanged at 22pc, saying the decision “takes into account” the declining trend in inflation (down to 27.4pc in August from a peak of 38pc in May). The SBP is confident that inflation will continue falling, especially from the second half of this fiscal year ie, July-December.

The central bank further said, “the expected ease in supply constraints owing to better agriculture output and the recent administrative measures against speculative activity in the foreign exchange and commodity markets would also support the inflation outlook.” In plainer words — the measures will help ease inflation.

That is where the central bank seems to have relied more on the projected agriculture output and the effects of the ongoing crackdown against currency and commodity hoarders and smugglers. Such crackdowns are not new. Overestimating their impact on the supply chain is not good for developing a realistic outlook of inflation, particularly when energy prices are rising in the international market and being passed on to the end consumers — a fact that the SBP has also admitted in its monetary policy statement.

In fact, occasional crackdowns against currency and commodity hoarders and smugglers are cyclical responses to structural problems. They have been launched in the past at times of political unrest and uncertainty, and this time, too, their “appropriate” timing is obvious.

Occasional crackdowns against currency and commodity hoarders and smugglers are cyclical responses to structural problems

Being cyclical in nature, these crackdowns remove the symptoms of deep-rooted problems in our economy. People take a sigh of relief for some weeks — or, at best, for a few months — only to feel extremely disappointed and more frustrated than before when fresh symptoms of the deep-rooted illness come to the fore.

Unless structural issues surrounding smuggling and hoarding are addressed, occasional crackdowns will continue to offer what they can, at best — temporary relief.

While keeping its interest rate unchanged — for the second time — at 22pc, the SBP has also “stressed maintaining a prudent fiscal stance to keep aggregate demand in check.” For a caretaker government fully backed by the powerful establishment, it is possible to keep aggregate demand in check by not pursuing economic growth. The IMF conditions attached with just $1.2bn temporary relief are also effectively growth-killing.

So, regardless of all the tall promises being made about turning around Pakistan’s economy, economic growth during this fiscal year will be too little to lift millions of Pakistanis out of joblessness and poverty. Whether an elected government will be able to accelerate growth for job creation and poverty reduction depends on when and how smoothly elections are held, who comes into power, and what happens to Pakistan’s external economy.

If the external sector’s fundamentals do not improve dramatically, then whoever comes into power will again have to knock at the IMF’s door. And the IMF would again attach tough (but principally understandable) conditions to its fresh lending.

The most important of them could be the continuation of energy sector reforms, privatisation of bankrupt state-owned enterprises, increased documentation of the economy, expansion of the tax base and continuation of withdrawal of all kinds of subsidies.

Pakistan’s foreign debts are at very high levels. We continue to survive through rollovers of foreign funding by friendly countries. No government can change this situation in a year or two. Besides, structural weaknesses of our economy are such that they may continue to prevent a dramatic rise in exports while keeping imports in check.

So, the trade deficit will also grow whenever economic growth picks up. Remittances are already declining. Boosting their volumes in the near future is not so easy due to our labour export dynamics and because the work and investment environment for non-nationals is changing rapidly in the host countries of the Pakistani diaspora.

The only option left now is foreign investment. That is why the civil-military Special Investment Facilitation Council is desperate to attract as much foreign investment as possible. One can only wish them good luck.

Published in Dawn, The Business and Finance Weekly, September 18th, 2023