SUMMARY of the Article “Mixed Developments” by Khurram Husain, Dawn, October 3rd, 2024
The article discusses Pakistan’s current economic situation, which, though not entirely bleak, remains challenging. The government is nearing the end of the stabilisation phase in economic management, with encouraging steps like the debt buyback plan aimed at reducing the burden of maturing Treasury bills. Domestic debt, now nearly 50% of the country’s GDP, remains a significant concern. Inflation has fallen to below 7%, earlier than projected, due to a tightly controlled money supply, validating the State Bank’s high-interest rates strategy. Despite the improvement in some macroeconomic indicators, such as higher-than-expected revenue grants and a better primary balance, uncertainties persist. The latest IMF projections show some improvements compared to May 2024 forecasts, but the economy’s debt burden and external vulnerabilities remain issues that need long-term resolution. The article highlights the fragile nature of this current period of stability, achieved after over a year of stringent economic adjustments. It warns against a premature shift toward growth without first implementing essential reforms. The economy is not yet ready for growth, and hastily pursuing it without addressing underlying structural weaknesses, like unproductive state-owned enterprises and inefficient private firms, could lead to another economic bust. The writer emphasizes the need for a vision of reform to break the cycle of short-term stability followed by instability.
Easy/Short SUMMARY:
Pakistan’s economy is improving, with inflation dropping and some positive developments in government revenue. However, the country’s domestic debt is still a big concern, and the economic stability achieved is fragile. The article warns against moving too quickly toward growth without making necessary reforms. If the government does not address issues like inefficient state-owned enterprises and private companies relying on government support, the current stability could easily collapse.
SOLUTIONS of The Problem:
Debt Management
The government should focus on reducing the domestic debt burden, ensuring that debt buybacks are not simply replaced with other debt instruments.
Implement Structural Reforms
Introduce reforms to state-owned enterprises and encourage private sector firms to improve their competitiveness without relying on government support.
Focus on Sustainable Growth
Instead of rushing toward growth, the government should first strengthen the economy’s productivity through long-term investments in key sectors.
Continue Tight Monetary Policy
Maintain tight control over the money supply and interest rates until inflation is under complete control and the economy is more stable.
Avoid Short-Term Fixes
Avoid strategies like subsidies or artificially low exchange rates that offer short-term boosts but lead to long-term instability.
Engage International Financial Institutions
Work closely with the IMF and other international institutions to implement policies that promote fiscal discipline and macroeconomic stability.
Improve Fiscal Responsibility
Ensure that revenue collection is optimized and that expenditures are kept under control to prevent future fiscal imbalances.
Support Competitive Markets
Encourage competition in the private sector by reducing rents and government bailouts, allowing businesses to thrive based on merit.
Long-Term Economic Vision
Develop and implement a long-term vision for economic reform that addresses productivity, reduces dependency on external debt, and ensures sustainable growth.
Monitor External Debt Payments
Keep an eye on external debt service obligations and manage reserves to avoid external vulnerabilities.
IMPORTANT Facts and Figures Given in the article:
- Pakistan’s domestic debt is close to 50% of GDP.
- Inflation has dropped below 7% due to controlled money supply.
- Revenue grants are projected at 12.6% and 15.4% of GDP for fiscal years 2024 and 2025.
- The primary balance is projected at 0.9% and 2% of GDP for the same years.
- Government debt was projected to be 73% and 75.1% of GDP for fiscal years 2024 and 2025.
MCQs from the Article:
1. What percentage of GDP does Pakistan’s domestic debt currently stand at?
A. 40%
B. 50%
C. 60%
D. 70%
2. What is the current inflation rate according to the article?
A. Below 5%
B. Below 6%
C. Below 7%
D. Below 8%
3. What fiscal years are referenced in the IMF’s projections in the article?
A. 2023 and 2024
B. 2025 and 2026
C. 2024 and 2025
D. 2026 and 2027
4. What was the primary balance projected at in May 2024 for fiscal years 2024 and 2025?
A. 0.2% and 0.8% of GDP
B. 0.4% of GDP for both years
C. 1.0% and 2.5% of GDP
D. 0.9% and 2% of GDP
5. When was the last time the economy saw a similar period of stability?
A. 2019
B. 2021
C. 2015
D. 2010
VOCABULARY:
- Stabilisation (noun) (استحکام): The process of making something more stable.
- Treasury bills (noun) (خزانہ بل): Short-term government securities with maturity of less than a year.
- Consumer Price Index (CPI) (noun) (صارف قیمت انڈیکس): A measure that examines the weighted average of prices of a basket of consumer goods and services.
- Year-on-year (adjective) (سال بہ سال): Comparing data from one year to the next.
- Macroeconomic indicators (noun) (معاشی اشارے): Statistics that indicate the current status of a country’s economy.
- Primary balance (noun) (بنیادی بیلنس): The fiscal balance excluding interest payments on outstanding debt.
- Debt buyback (noun) (قرض کی واپسی): The repurchase of a debt by the debtor.
- Austerity (noun) (کفایت شعاری): Policies aimed at reducing government deficits through spending cuts and tax increases.
- Reserves (noun) (ذخائر): Funds or resources held for future use or to cover financial liabilities.
- Bailouts (noun) (امداد): Financial support to a company or country which faces serious financial difficulty.
- Inflationary bushfires (noun) (مہنگائی کی لہر): A rapid and uncontrolled increase in inflation.
- External vulnerabilities (noun) (بیرونی خطرات): Risks or weaknesses related to a country’s economic dependence on external factors, such as foreign debt or imports.
By following these insights, Pakistan can move toward a more sustainable and stable economic future, with the necessary reforms and strategies in place.
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Mixed developments
Khurram Husain
THE news is not all bad, though the outlook remains gloomy and will take at least a year to rectify. The stabilisation phase of economic management is drawing to a close.
The government is making the right moves with plans for a debt buyback to retire a large amount of maturing Treasury bills, although one hopes this won’t simply be swapped with one debt instrument or another. The sheer size of the domestic debt, standing at slightly below 50 per cent of the total GDP (at current market prices), certainly makes it the elephant in the room, and it seems the government might finally be turning its attention to bringing this under control.
Inflation dropping to below 7pc, based on the year-on-year increase in the Consumer Price Index, is also a welcome development. This was supposed to happen by the same time next year as per projections, but tightly controlled money supply has managed to nip the problem in the bud. As an aside, this should put to rest the questions raised during the period the State Bank ran record-high interest rates to combat the record-high inflation.
Numerous people have asked whether high interest rates have ever helped bring inflation down in Pakistan. The answer is that high interest rates are pretty much the only tool that has ever succeeded in putting out inflationary bushfires, whether in the late 2000s or the early 2020s.
But compare some macroeconomic indicators shared in the latest IMF statement following the Executive Board’s approval. The final report has still not been released, so we will have to wait a few more days for the finer details. Broadly speaking, though, almost all projections show improving fundamentals when compared with the same projections from the staff report of May 2024, which came at the conclusion of the last Stand-by Arrangement.
Here are some examples of what was projected for fiscal years 2024 and 2025 in May. Revenue grants were seen coming in at 12.5pc and 12.4pc of GDP, whereas they are now projected at 12.6pc and 15.4pc, respectively. The primary balance on the fiscal account was projected to show a surplus of 0.4pc of GDP for both fiscal years back in May.
Today, it is projected at 0.9pc and 2pc of GDP instead, a marked improvement. Back in May, general government and government-guaranteed debt was projected to come in at 76pc and 73.6pc of GDP for both fiscal years. Today, it is projected at 73pc and 75.1pc, showing some improvement in the current fiscal year, but something is driving it back up again next year. To find out why it is projected to rise in the next fiscal year, we will have to wait for the staff report.
The economy has not seen a period of stability like this since at least 2019.
The story continues, though. On the external side, projections drawn up in May on the current account showed a deficit of 0.8pc and 1.2pc in the two respective fiscal years. In the latest projections for the same fiscal year, these have come down to 0.2pc and 0.9pc respectively. Projections of gross reserves are more or less unchanged in both scenarios, hinting possibly at higher debt-service payments on the external side in the next fiscal year, but once again, we will have to wait for the final staff report to be released before being able to say anything definitively.
The story goes on and on. The economy has not seen a period of stability like this since at least 2019. Calm is returning to the markets, to the outlook, to the macro indicators, the fiscal equation, and the monetary aggregates after a period of intense volatility that ran at least from 2021 to 2023. This much is undeniable, and it needs to be said.
However, another thing also needs to be said. This is a fragile calm reached after a hard-fought struggle. It has taken more than 13 months of relentless adjustment and hewing to very tough and narrow conditions to achieve it. But it can be lost in 13 weeks if the rope of adjustment is let go prematurely. The staff report to be released in the next few days will tell us how long this bout of austerity and stability must last before the country can be said to be out of the woods. But it is safe to say that not much can change until end FY25.
Periods of calm have been brought about in the past as well. The year 2019 was the last example. Before that, we had a volatile period of destabilising growth in the mid-2010s. Prior to these was another period of very difficult adjustment and absorption of the consequences of the great financial crisis as well as the escalating war on terror.
In each case, the hard-fought stability was squandered as the government of the day gunned for growth without reform. Rather than making changes to the economy’s productivity, growth was induced by showering resources upon economic agents, whether in the form of subsidies, artificially low exchange rates and interest rates, amnesty schemes, and other such gimmicks. That is what created the boom. That is also what created the bust.
This is the temptation that must be avoided now. In the weeks to come, the rulers are likely to feel that enough has been done to stabilise the economy, and the time has come to shift gears towards growth. But the economy is not ready for growth, and pumping the accelerator will only squander this stability and bring back volatility and shrill warnings of default.
It is important to draw up a vision of reform that can help the economy shed its baggage of unproductive state-owned enterprises that have been kept afloat only by government bailouts and uncompetitive private sector firms addicted to rents. Without such a vision, Pakistan will forever remain trapped in a low-growth equilibrium.
The writer is a business and economy journalist.
X: @khurramhusain
Published in Dawn, October 3rd, 2024
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