Published in Dawn, October 5th, 201

INDUSTRY leaders’ recent round of meetings with the army chief
and then the prime minister betrays a sense of mounting anxiety

around the state of the economy. Such meetings have taken place
before too, but rarely have they been made into high-profile affairs,
complete with press releases and photographs being issued
afterwards. Both meetings dragged on for hours, and though the
details of what was discussed are sketchy, it is clear that the
message given by the army chief to the industry leaders was one of
patience. He found it necessary to underscore that the army and
government were on the ‘same page’, and told the attendees that it
would take time to stabilise the economy. This message captures
the gist of what took place at these meetings. The industry leaders
have been asked to not expect rapid changes, and expectations of
any revival packages need to be tempered. Why the message could
not have been delivered by the government alone is an indictment
of the latter’s own inefficiencies.
For the moment, the government is constrained to walk the path of

adjustment and resources are limited. But beyond resources, two themes that
have repeatedly emerged in public pronouncements by these leaders is a
runaway accountability drive that is being led by people who do not
understand the nature of the business deals they keep interfering in, and the
poor quality of implementation of the government’s policy direction. These
elements are unrelated to the availability of government resources or the
ongoing economic adjustment. They relate directly to the political choices
being made by the government, as well as the poor quality of leadership
coming from the top. This is turning into an unmistakable conclusion.
Decisions are made but rarely implemented. Policies are debated, drafted,
perhaps even signed, but the wheels of government below the line do not move
in tandem with what the policy dictates. The only direction that economic
policy has today is a relentless adjustment, gained through taxes and a pitiless
strangulation of the economy through ‘demand compression’. Beyond this,
there is nothing. And the danger now is that after the voice of the industry
leaders has been heard but not heeded, we will be left with an economy that
has no deficits but not much of a productive base either. Without thinking
beyond adjustment, the government will undoubtedly run the risk of repeating
yet one more cycle of eternal return to the IMF.
Published in Dawn, October 5th, 201

EVERY economic crisis has a typical transmission path or
trajectory. The contagion starts with a disturbance in the external
account caused by a large trade gap, a spike in debt repayments
and/or ‘hot money’ heading for the exits. Its effects are
immediately felt by the asset markets, where plunging forex
reserves drag down both the local currency as well as market
confidence. Usually in around six to nine months, the external
shock is transmitted to the real sector of the economy, with the
economic downturn forcing business closures and job losses.
In economies where the banking system is more integrated with global

financial markets and open to foreign investment, such as Argentina or
Turkey, banks are usually at the epicentre of the crisis early on, which
exacerbates the effects of the shock. In economies like Pakistan where the
banking system has, so far, been relatively insulated from foreign capital
flows, banks typically face stress (depending on the severity of the crisis)
towards the end of the cycle when recessionary conditions in the economy lead
to mounting non-performing loans. This is all the more reason to insulate it
from hot money flows, which the State Bank is encouraging.
The post-stabilisation cycle works in reverse. Complemented by an IMF

programme, the defensive measures put in place by policymakers typically
stabilise the external account first, followed closely by the asset markets. The
real sector feels the effects of stabilisation last. Depending on the magnitude of
the crisis, private investment and rehiring take at least one to two years to
resume post-stabilisation, usually longer.
In this context, it is both illuminating as well as depressing to point out that in

the previous major crisis episode in Pakistan back in 2008, it took 10 years
before economic growth managed to cross the rate of GDP growth recorded
one year prior to the start of that crisis.
Recessionary conditions prevail as a result of both the

crisis and the response.
So where are we in this crisis? The external account, which took a massive hit
between July 2018 and July 2019, has shown some signs of stabilisation.
However, it may be too early to declare that the corner has been turned. The
crisis has morphed from an external trade shock to a debt crisis, suggesting
possible persistence. It is in this context that the overall conceptual design of
the Fund programme is open to valid criticism as its size and back-loaded
disbursement leaves the external account’s vulnerability in place — rather
than attacking it forcefully up front. The implication for an early and vigorous
restoration of market confidence is sadly more than obvious.
Read: Stabilisation efforts bearing fruit: SBP
Predictably, the shockwave from the crisis has transmitted from the external
account to the real sector. The large-scale manufacturing sector’s output has
been in negative territory for eight consecutive months, starting December last
year through to July 2019. Sales of cars, motorcycles, trucks, buses and
durables are all down massively, as are petroleum sales (especially of high
speed diesel, a bell-weather for economy-wide activity). Similarly, capital
goods imports as well as private sector credit demand from banks have also
recorded negative or falling growth.
Unsurprisingly, exports appear to be a bright spot, however. The much-

needed adjustment of the rupee, among other factors, has given a boost to
exports in terms of quantity of key textiles products such as garments,
knitwear, bed wear and fabrics. Nonetheless, in terms of the domestic
economy, even fast-moving consumer goods have been impacted with
companies reporting more hesitant consumers, lower sales, and ‘down-
shifting’ from premier to lower segment brands as well as to smaller packets.
Retail outlets anecdotally report a decrease in footfall of 60-70 per cent over
the past two months especially, with traders in some of the country’s main
wholesale markets reporting a fall in sales of around 50pc over the same
period.
A recent national survey conducted by Ipsos Pakistan in August this year

validates the bearish sentiments gathered anecdotally. According to the
survey’s findings:
In comparison to one year ago, nine out of 10 Pakistanis are feeling less
comfortable while purchasing general household items as well as major ones
like cars, homes etc.;
In comparison to one year ago, eight out of 10 Pakistanis are feeling less
confident about their job security and ability to save and invest in the future;
About one in three Pakistanis reported witnessing themselves or people

known to them personally, who lost jobs in the last one year due to economic
conditions;
Only one out of 10 Pakistanis are optimistic about their well-being in coming
times.
Read: Slowdown to persist as stabilisation advances: ADB
A large part of the slowdown in the economy is a ‘natural’ outcome of the crisis
and the ensuing stabilisation measures. This time around, another element is
adding to the uncertainty as well as negative sentiments of some economic
agents — a concerted documentation drive by the authorities. Reform of an
entrenched status quo is by definition always disruptive. However, this
disruption is both necessary as well as positive and policymakers should both
recognise, as well as accept, the trade-off with short-run growth.
Nevertheless, the implication of the severity of the crisis coupled with the
serious effort at documentation is that Pakistan’s economy is unlikely to see a
quick ‘V-shaped’ recovery any time soon. Uncertainty among large segments
of trade and industry prevails along with disruption to domestic supply chains
and markets. This is unlikely to dissipate significantly during the duration of
the IMF programme.
However, the government can mitigate the effects with a more well-thought-
out roadmap to achieve a transition from stabilisation to growth (the subject
of a subsequent article). Greater clarity and congruence in its reform
objectives and plans will lead to more consistency in its pronouncements —
which, in turn, will restore policy credibility. Finally, the perennial missing
link in this government’s economic plans is strategic communication. It has to
fashion a consistent and credible reform narrative — and then convincingly
‘sell’ it to investors and the markets.
The writer is a former member of the prime minister’s economic advisory

council, and heads a macroeconomic consultancy based in Islamabad.
Published in Dawn, October 11th, 201

Published in Dawn, October 5th, 201

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INDUSTRY leaders’ recent round of meetings with the army chief

and then the prime minister betrays a sense of mounting anxiety

For the moment, the government is constrained to walk the path of

Published in Dawn, October 5th, 201

In economies where the banking system is more integrated with global

The post-stabilisation cycle works in reverse. Complemented by an IMF

In this context, it is both illuminating as well as depressing to point out that in

Recessionary conditions prevail as a result of both the

Read: Stabilisation efforts bearing fruit: SBP

Unsurprisingly, exports appear to be a bright spot, however. The much-

A recent national survey conducted by Ipsos Pakistan in August this year

About one in three Pakistanis reported witnessing themselves or people

Read: Slowdown to persist as stabilisation advances: ADB

The writer is a former member of the prime minister’s economic advisory

Published in Dawn, October 11th, 201

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