In search of growth 2024

There is an emerging restlessness with this new setup, in the government at least, with the process of economic growth adjustment, and a desire, however vague, to find a way of sparking growth.

This itch arises out of the understanding that the only way to cure the annoying fever of Imran Khan, which has infected the electorate, is to guarantee at least a couple of years of economic boom. In the past, Pakistan has achieved a few flashes of growth by employing general liquidity – both foreign and domestic.

The foreign resources are in the form of FDI and loans, with some support from increasing and fairly stable remittances and exports. The itch grows out of the realization that the most certain way to break the Imran Khan fever gripping the electorate is to provide at least a couple of years of rapid economic growth. But how to do this?

In the past, Pakistan has produced brief growth spurts using liquidity injections — both foreign and domestic. Foreign liquidity has come in the form of direct investment and debt, with some assistance coming from steadily rising remittances and exports. There were three management-induced growth surges with the use of the liquidity shots. One of them existed from approximately 2002 up to 2007 and then shifted into an end-stage in 2008. The second one transpired from 2014 to 2017, with the terminal crisis of 2018. The third started in the middle of 2020 and concluded in 2021, but the final phase was in 2022 only.

Each one of these had its main motor force as liquidity injections. First of all, it was stabilized based on post 9/11 post – inflows which were supported by various sources, not only $12 billion of American funds within 2002/2008.ut of the realization that the most certain way to break the Imran Khan fever gripping the electorate is to provide at least a couple of years of rapid economic growth. But how to do this?

In the past, Pakistan has produced brief growth spurts using liquidity injections — both foreign and domestic. Foreign liquidity has come in the form of direct investment and debt, with some assistance coming from steadily rising remittances and exports. Three separate growth spurts were engineered using liquidity injections. One ran from roughly 2002 till 2007, before entering its terminal crisis in 2008. The second one ran from 2014 to 2017, before entering its terminal crisis in 2018. And the third ran from the middle of 2020 till 2021, before entering its terminal crisis in 2022.

Each one of these had liquidity injections as their main motor force. In the first instance, it was post-9/11-based inflows that came from various sources, going far beyond the $12 billion in American funds between 2002 and 2008.

In the second case, the inflows were extremely concentrated over a few months in 2014 from a $1.5bn Saudi Arabian deposit, a $2bn Eurobond, commercial borrowing by the Indian government (of an unknown amount), rollovers on maturing oil payments and lastly, $500m from a telecom spectrum sale.

Combined with a severe contraction in the current account deficit in the backdrop of an IMF program, besides large volumes of external support from the World Bank and Asian Development Bank, some of those months in the first half of 2014 recorded one of the biggest positive shifts in the external balance outlook in decades. In its third quarterly report for the year, the State Bank said: “There has not been such a string of positive developments in the external sector for Pakistan since late 2001.”y the government (of an undisclosed amount), rollovers on maturing oil payments, and $500 million from a telecom spectrum auction suddenly buoyed the reserves in a matter of weeks.

Coupled with a sharp fall in the current account deficit under the auspices of an IMF program, along with large inflows from the World Bank and Asian Development Bank, those months in the first half of 2014 posted one of the largest improvements in external sector outlook the country had seen in decades. “Since late 2001,” the State Bank said in its third quarterly report for the year, “Pakistan has not experienced such a sequence of positive developments in the external sector.

This was even before the CPEC-related inflows started coming. The third was incurred during the period of the pandemic.st in a few months in 2014, when a Saudi Arabian deposit of $1.5bn, a Eurobond floatation of $2bn, commercial borrowing by the government (of an undisclosed amount), rollovers on maturing oil payments, and $500 million from a telecom spectrum auction suddenly buoyed the reserves in a matter of weeks.

Coupled with a sharp fall in the current account deficit under the auspices of an IMF program, along with large inflows from the World Bank and Asian Development Bank, those months in the first half of 2014 posted one of the largest improvements in external sector outlook the country had seen in decades. “Since late 2001,” the State Bank said in its third quarterly report for the year, “Pakistan has not experienced such a sequence of positive developments in the external sector.” This was even before the CPEC-related inflows began.

The third major liquidity bonanza came with the pandemic. It was a September 11 tragedy for a majority but a gold mine for the successive governments and the incumbent government was no exception to having it more in terms of benefit than burden.

First, the ongoing IMF program was suspended and the government’s hands were freed to use the fiscal and foreign exchange buffers that they built under the program since July 2019. Which was accompanied by an exogenous disbursement of 1.4bn USD in emergency funds Not only that, but also; This was followed by an inconsistent but rather sufficiently frequent inflow of funds through the WB and ADB and through debt swaps which greatly relieved pressure on debt-service burdens.n immediate emergency disbursement of $1.4bn, coupled with lumpy inflows from the World Bank and Asian Development Bank and a debt restructuring that took the pressure off debt-servicing costs significantly.

One can already discern potential for the same reflexes, which in previous cycles stimulated liquidity-induced growth spurts.

In all three cases, sources of liquidity inflows were multiple, yet concessionary finance from the Bretton Woods institutions and bilateral sources dominated. Pervasive across all three episodes was how the government utilized these inflows. They cut interest rates vastly while pegging the exchange rate, they kept it artificially low and increased government expenditure and announced:

said, “new favorable measures” for investment activity whether through “tax amnesties” or cheap credit from the State Bank or subsidized power tariff for the so-called ‘export-oriented industry rate artificially low while hiking government spending and announcing “special incentives” for investment activity, whether via amnesty schemes or subsidized credit from the State Bank or even special subsidies on energy for “export-oriented industry”.

The outcome in each case was an economic expansion that started as soon as the accumulations of ineffective capacity which were dormant during the previous phase of economic restructuring began to expand. In all three cases, it was observed that growth commenced within months. In all three cases, growth failed at the same deficits that had plunged their antecedents toward a balance of payment disequilibrium.

Woods institutions as well as bilateral sources. How the gove­rnment used these inflows was common in all three episodes. They lowered interest rates shar­ply and held the exchange rate artificially low while hiking government spending and announcing “special incentives” for investment activity, whether via amnesty schemes subsidized credit from the State Bank, or even special subsidies on energy for “export-oriented industry”.

The result in each case was a growth spurt that began almost immediately, as the idle capacity that was lying unutilized during the preceding period of economic adjustment suddenly kicked into motion. In all three cases, growth started within months. And in all three cases, growth stalled on the very same deficits that had driven their predecessors toward a balance-of-payments crisis.

All of them however relied on huge liquidity boosts to spur on growth. This had two very crucial effects. The liquidity resulted in inflation on one side and trade deficit on the other leading to a decline in reserves and emerging of current account deficits in virtually all the emerging economies, followed by a return to a balance of payment crisis coupled with high inflation. and mushrooming current account deficits, followed by a return to a balance-of-payments crisis amid high inflation. There was no exception. It was always the same scenario for every growth spurt.

Once again, one can discern the same reflexes as in a number of previous global credit-led growth sprees starting to unfold. The urge to use the rebuilt foreign currency reserves to effectively pressure the dollar down is hidden just around the corner.

For instance, more than a month ago, Deputy Prime Minister Ishaq Dar used to speak at the Pakistan China Institute to advocate that the intrinsic price for the rupee should be below or equal to 240 per dollar. His utterance caused a stir and reminded people of August 2022 when he had used similar words to remove the then finance minister and appoint himself for a futile endeavor to reduce the exchange rate. Ives and mushrooming current account deficits, followed by a return to a balance-of-payments crisis amid high inflation. There was no exception. Every growth spurt ended the same way.

Once more, it is possible to see the same reflexes that drove earlier liquidity-fuelled growth booms beginning to express themselves. The desire to use the rebuilt foreign currency reserves to bring down the price of the dollar, for example, is lurking just beneath the surface.

Just over a month ago, for instance, Deputy Prime Minister Ishaq Dar used the occasion of an address he had to give at the Pakistan China Institute to argue that the real value of the rupee should be at or below 240 to a dollar. His statement stirred much controversy and revived memories of August 2022, when he had used similar statements to dislodge the then finance minister and install himself instead, in a vain bid to bring down the exchange rate.

But beyond Mr Dar’s bad economics, the desire for liquidity is rising in the government as the costs of an extended economic stagnation under an IMF program start to emerge. Businesses are eager there must be a steep cut in interest rates something that is also supported by ministers.

The third instance is that the prime minister has been visiting Saudis many a time in an attempt to negotiate an attempt to somehow release some cash aid from the kingdom but this has not yielded positive results.IMF program begins to bite. The industry is clamoring for a rapid reduction in interest rates, a sentiment that is being echoed by ministers. The prime minister’s repeated visits to Saudi Arabia are also an effort to try and pry some financial help from the kingdom but have so far not borne fruit.

Fever, as time will move on, the rate of it will increase. Certain signs along the line may concern, for instance, whether they opt for midyear unscheduled Eurobond floatation or whether discipline in containing development expenditures within set values starts to relax. Pakistan has never in its history experienced a growth episode that was not induced by a boost of foreign funding and there is no evidence why the tendency should not persist shortly. The minds and thinking of this country’s policymakers do not go any further than this.

The continuing economic reform inherent in the most recent IMF program is poised to lose support at an increasing rate going forward. However, the foundation to get the growth going again is not there. And there lies the rub – a big problem you might say.

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