Economists round the globe recommend a low rate of inflation coupled with steady growth in personal disposable incomes. The rationale being that there is enough purchasing power intact for the majority in the society to consume; increase the industry revenue, create more jobs and thus complete an economic growth cycle. The other scenario, that of stagflation goes against the prospects of growth. In that scenario, inflation continues to rise, while the decreasing purchasing power has a cascading impact upon the entire growth cycle; the result; fewer jobs, greater frustration and consequent social unrest.
A trade-based business strategy, where Pakistan is able to minimize the current account deficit, consequently stabilize the foreign exchange rate, can be the beginner. Towards that end, the return to the democratic norms as enshrined in the 1973 Constitution are direly needed. Even a layman knows that political uncertainty is a killer to sound investment decisions. The second deterrent is stagflation. The powers on the horseback need to encourage the proverbial ‘camel caravans’ with trade merchandise to facilitate the much needed turn around. A controlled inflation will naturally follow the trends
Here it is equally important, how the various stakeholders see the developments and how they perceive the other stakeholder. Of prime importance is the strategies adopted for the correction of the economy. Even more critical is that whether the prescription adopted has relevance to the scenario where it is implemented. Social scientists, including economists, agree on the point that human behaviour studies, which are the major thrust of the social sciences, rest on models, dependent upon assumptions. Where the human factor is accounted for, results can never be scientific or mathematical. The human factor can cause big error twists on both sides, towards success or towards a strategy crashing. Keeping all these above-mentioned assumptions in mind the economic quagmire can be understood and if there are people ready to face the true scenarios, a practical way out can be thought over, if not implemented.
Taking head-on the Pakistani experience; to begin with, the bi-monthly monetary policy statement issued as per the conditionalities imposed by the IMF, which is regarded as one of the major functions of any central bank for controlling inflation; practically fails to confirm to its true utility and relevance. The concept of the central bank as an authority controlling inflation rests well with the great economists of the West. The reasons being that the rules of business of the Federal Reserve or the Bank of England were the outcome of the findings of the economists, based on study of the specific human behaviour factor. That might not be the case with any economy other than the West. Even if that economy as part of ‘adopting the best international practices’ forms a central bank and jots down in its act; that the central bank will control the inflationary surge, with the monetary policy as a credible tool.
In the western economies referred to above, the private sector has been the deciding factor rather than just a member of the board of the central bank. The result has been that these economies have an easy solution to venture capital, creation of investment opportunities and consequent economic growth. Despite the fact that these western powers are best represented by the political governments controlling the military-industrial complex; the industrial complex is not in the domain of the military or for that matter the politically elected administration representing the state and the government simultaneously. The private sector has been an equal partner as a vendor as well as a credible engine of economic growth.
Regretfully, in states and economies like Pakistan, none of the rules of business match the ones in the developed economies. The Pakistan banking sector is elite-driven, where an already rich group of individuals is accorded further credit; whether they are landed aristocrats or urban business houses. That banking sector for that matter does not dispense credit to most of the population. That fact is well recorded by the economic managers. Pakistan is one of the societies where the banking sector exposure is a mere 20 percent, at a conservative estimate.
Such an economy is not designed to take the impact of any changes in discount window rates, popularly known as monetary policy decisions. With the private sector composed of elite business, it is still a minority stakeholder for private credit. It is a financial system which is experiencing a proverbial ‘crowding out phenomenon’, practically the monetary policy statement, so religiously debated by the fund’s managers research units is just the rate at which the state is to sell its T-bills to the banking sector for generation of credit. By crowding out, it means that the banking sector instead of advancing credit to the individual or the private business and creating bad debts; opts for providing credit to the sovereign government against purchase of T-bills. The banking industry plays safe. The monetary policy practically decides the rates of Central bank discount window, the discount rate of the banking industry and consequently at which rates, the government is lifting credit from the financial market and obviously retiring it at some advanced date.
A look at the Pakistani inflation paradigm very strongly reflects that the inflation experienced has been more cost-push that demand-pull. The price of the exchange rate as well as the dependence upon the imported inputs have been the deciding factors for the micro as well as macro instances of inflation. An underdeveloped dairy sector dependent upon powdered milk from western sources is invariably tied to the global trends. Likewise, a free-floating exchange rate is a recipe to keep the prices escalating.
A conservative central bank has within its fold the mandate to keep the foreign exchange rate or in the specific case of Pakistan, the dollar, at bay to plug in the scenario of inflation based on exchange rates. However experience and the current situation reveals that a stagflation-ridden economy like Pakistan has been allowed bouts with a fluctuating exchange rate regime. Here it is pertinent to mention that past economic managers despite the IMF strings have been articulate in keeping the exchange rate at least stable enough to infuse a rational decision-making confidence on part of the businesses. For the rationale best known to the post 2018/19 economic teams’ courtesy the ‘hybrid honeymoon’, an economy as Pakistan was ill suited for an exchange rate regime, so highly market-based; when it is a foregone conclusion that economies like Pakistan can be manipulated by clever players. For obvious reasons, even the most confident of the economies, feel it their sovereign responsibility to keep the exchange rate at bay with precision guided market operations, which many conservative economists might agree with.
That free fall rate was bound to put the jet of the economy into a dangerous tailspin, culminating in crash on impact. The Pakistani experience with inflation, whether it was inspired by the ‘hybrid’ team or by the IMF-led economists, proved to be the most devastating dampener to any future hope for economic turnaround.
Practically, Pakistan needs unconventional solutions for the economy to recover and hopefully grow, as it should be given the comparative advantages it has. Given the fact that the direction of the state, debated many times on these pages, needs to be corrected, the inflationary cycle might not be broken by monetary policy statements or by adopting faulty donor prescriptions. The economic management needs a very intimate input of all the stakeholders. Installing a few industry captains in positions of privilege (read ministries) or decision-making boards of directors might not change the situation for good. Private sector sentiment might be the key to economic revival, which can in turn translate into the revival of national prestige.
A trade-based business strategy, where Pakistan is able to minimize the current account deficit, consequently stabilize the foreign exchange rate, can be the beginner. Towards that end, the return to the democratic norms as enshrined in the 1973 Constitution are direly needed. Even a layman knows that political uncertainty is a killer to sound investment decisions. The second deterrent is stagflation. The powers on the horseback need to encourage the proverbial ‘camel caravans’ with trade merchandise to facilitate the much needed turn around. A controlled inflation will naturally follow the trends…..!
