Dramatically rising from the ashes of its predecessor, a phoenix, in ancient Greek mythology, is a bird reborn after a catastrophe with more strength and power. After posting 49 months of back-to-back current account deficits, Pakistan’s economy suddenly posted a surplus. The stock market rose by over 8,000 points in the last few weeks. One billion dollars of hot money poured into the country but is a clear sign of confidence in the stabilisation of the economy. Is Naya Pakistan’s economy about to rise like a phoenix or is this a mirage?
Let’s talk about the current account deficit turning a surplus. Recall, defaulting on our external liabilities is the single biggest crisis the PTI government inherited. When the PML-N finished its term, the caretaker government rushed to China for a stopgap financing arrangement to avoid default. Businesses couldn’t open LCs because the country didn’t have enough dollars to make the imports it needed.
As a result, the PTI government had to administer chemotherapy to fight the cancer of twin deficits ripping our economy. The chemotherapy had painful side effects in the shape of inflation and devaluation. However, months later, the first positive signals are palpable. The cancer of deficit is crumbling under the treatment’s sustained pressure; the current account deficit is finally under control!
At the height of the crisis, I argued in this paper that the PTI government was doing the right thing by administering this economic chemotherapy. I was criticised by those who argued the economy was being run into the ground by PTI’s ‘incompetent’ economic managers. Today, a spectacular 8,000-point bull-run on the KSE demonstrates that smart money and investors think Pakistan is about to take off, not collapse. Hot money pouring in from foreign investors shows the economy has stabilised, even though I’m not comfortable with the volatility of hot money.
The reason this is great news is because reducing the current account deficit is the only way to break out of our debt cycle with the IMF. The reason every new government rushes to the IMF is because the net outflow of dollars from the country exceeds the net inflow. If we can keep our deficits to a minimum, it will transform the very nature of our economy and boom and bust cycles.
Moreover, positive signs show at least some reform is taking place to restructure the economy; 800,000 new tax filers and dramatic increases in tax collection are the most promising signs of an emerging fundamental paradigm shift. Pakistan’s biggest issue is that people will pay Zakat but not their taxes. This makes them politically disengaged and leaves the government unable to finance development, unless it borrows. If the government continues its fight to bring previously untouched sectors into the tax net we can finally enter sustainable growth cycles.
Even on growth which the opposition constantly criticises the government on, Pakistan is expected to beat its target by a significant margin. Journalists who don’t understand economics 101 have been screaming about a collapsing or shrinking economy. News flash: Pakistan’s economy didn’t shrink under the PTI. It just grew at a slower pace. And now that pace is picking up. There’s still a long way to go for Pakistan’s economy to perform at its peak but we are headed in the right direction.
Why the alarmist, doom and gloom narrative in the media then? The opposition finds a way to spin every good news on the economy negatively, often using incorrect facts. For example, the news of a current account surplus was countered by PML-N leaders with the idea that exports aren’t rising. A blatant lie, exports were up nearly 10% in the month we posted a current account surplus. Here’s the kicker: exports actually declined during the PML-N’s five-year tenure. And the biggest reason exports haven’t increased in Pakistan is because of the PML-N policy of keeping the rupee artificially over-valued to subsidise elite consumption.
Published in The Express Tribune, December 1st, 2019.