By Mihir Sharma
Mihir Sharma is a Bloomberg View columnist. He was a columnist for the Indian Express and the Business Standard, and he is the author of “Restart: The Last Chance for the Indian Economy.”
(Bloomberg View) — Like much else about Pakistan, it’s often infuriatingly difficult to determine whether or not its economy is on the brink of disaster. This week, as the Pakistani rupee lost 5 percent of its value in just three days, it looked like trouble was brewing. And sure, this might be a sign of the economy slipping towards a balance-of-payments crisis. But, then again, it might not. Pakistan doesn’t just live on the edge, it seems altogether nonchalant about being there.
The immediate cause of the rupee’s slide appeared to be a decision by the State Bank of Pakistan to stop supporting its value. For months, the rupee had held steady even as Pakistan’s foreign-exchange reserves dwindled; the country’s stock of dollars shrunk by almost 30 percent between January and October, before it went to the market in November to sell $2.5 billion of dollar-denominated bonds. The central bank appears not to want to play defense any more.
Perhaps that’s wise. Pakistan’s exports have fallen for three years straight; in October, its Commerce Ministry largely blamed the plunge on an overvalued currency. Many of Pakistan’s exporters are in particularly price-sensitive sectors, such as cotton. A cheaper currency could help them become competitive again.
Thanks in part to weak exports, Pakistan has been running a worryingly high current account deficit -– 4 percent of GDP in the last financial year, which in Pakistan ends in June. And the problem’s getting worse: Between June and October of this year, the current account deficit was more than twice what it had been in the same period in 2016. These are the kind of numbers that are causing people to mutter that Pakistan might have to go again, hat in hand, to the International Monetary Fund. The country just got done borrowing $6.7 billion dollars from the IMF last year.
Of course, weak exports are only half the problem. The other half stems from consistently high imports — chief among them the capital goods being imported from China as part of the much-heralded China Pakistan Economic Corridor. Half of Pakistan’s imports from China are capital goods, and their value rose by 30 percent between 2015 and 2016. Few in Pakistan have a bad word to say about the CPEC, but it certainly seems to be creating problems for the country’s economy. The IMF is right to be “appalled” at the implications for Pakistan of having to pay back billions of dollars in expensive loans to China with no export recovery in sight.
But nobody seems terribly alarmed. The government has made calming noises; senior Pakistani officials are reassured by the country’s robust growth. And, certainly, the Pakistani private sector seems bullish, enthused perhaps by the restoration of a degree of law and order to Karachi, the country’s economic hub, over the past few years, together with an easing of its chronic power crisis. If Pakistan’s businessmen seem eager to invest in its economy, things surely couldn’t be that bad.
But the problem, as always in Pakistan, is politics. It was politics that inflated the rupee for longer than was sensible. (It’s almost an iron rule that countries with powerful elites who earn cash locally to spend in Knightsbridge tend to keep their currencies overvalued.) After the rupee’s value dipped a bit in July this year, the finance minister personally intervened to change the head of the central bank. Now that finance minister’s gone too — another casualty of the corruption allegations that have decimated Pakistan’s government — and the rupee’s behavior has shifted alongside the political changes in Islamabad.
And it is politics that keeps the economy from reforming itself to take advantage of export markets — and, for that matter, to benefit from whatever Chinese investment does eventually materialize. Power tariffs and subsidies have to be rationalized if the sector is to continue to improve. Tax collection has to be made more efficient. Tariffs that disadvantage domestic producers have to be straightened out. A politics dominated by feudal overlords, oligarchs and the military has led to Pakistan becoming, in the words of the Pakistan Business Council, “a nation of import-reliant traders.” Only with sustained, export-oriented and private-sector-friendly reform will Pakistan break out of its cycle of overconsumption, balance-of-payments stress and foreign bailouts.
But Pakistan is only five months away from another general election. Its most popular and powerful politician has been irresponsibly removed from power by unelected judges, probably with the connivance of the military. And the country is constantly paralyzed by street agitations that weaken the civilian government’s authority. Pakistan’s military-trading elite coasts along comfortably in any case — but the economy as a whole is set up by its politics to underperform.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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