Pakistan’s economy has achieved some macroeconomic stability, both because of primarily oil prices being on the lower side, and healthy performance of remittances, not to mention squeezing aggregate demand by practicing over-board monetary-, and fiscal austerity policies. Yet, not much has been done in terms of reforms to unclog the aggregate supply-side bottlenecks.
Hence, one can see a continuous decline in inflation rate for a number of months– although prolonged level of high inflation was seen before that, which means price levels continue to remain on the higher side– but that has come at a high level of economic growth sacrifice, which has continued to remain around the population growth rate of a little more than 2 percent for the last two years or so. As a consequence, the unemployment rate has been rising, along with poverty, and income inequality.
Pakistan should stop following the neoliberal model of ‘price shock therapy’ and instead should follow ‘dual-track’ pricing mechanism, which will give the country a huge boost in terms of reaching sustainable economic growth, and macroeconomic stability, and break the boom-bust cycle, in which the country remains up till now. In addition to reducing income inequality, and poverty, it will also help increase economic resilience against the existential threat of climate change crisis; not to mention meaningfully decreasing an otherwise high level of debt
Although the country has shown primary surplus– mainly at the back of increase in tax rates over the last two years or so in general, including keeping petroleum levy high even when internationally oil prices have been falling, and are on the lower side, but mostly increasing otherwise regressive indirect taxes, and also through decreasing development spending– and balance of payments have overall has been under control, but this is once again at the back of primarily reduction in import reduction– at the back of excessive aggregate demand suppression– rather than enhancement in exports, or any meaningful increase in foreign investment, which continues to remain at very low levels.
Hence, while the build-up in foreign exchange reserves over the many months overall has been due to factors indicated above, and also loan amounts being secured from the International Monetary Fund (IMF)– where under the overall 37-month Extended Fund Facility (EFF) around $2 billion have been received up till now out of the total $7 billion, and before that through Standby Arrangement (SBA), not to mention $1.3 billion will be released under a recently negotiated 28-month Resilience and Sustainability Facility (RSF)– the level of foreign exchange reserves has not increased that much to make any significant increase in terms of strengthening the value of the rupee against the dollar.
Hence, as soon as the economy goes back on the growth path in any meaningful way, imported-, and cost-push inflation will likely rise, putting upward pressures on both the overall inflation in the country, and current account deficit. While this will likely disturb better growth prospects, given the country’s growth– in terms of domestic consumption, and exports– is primarily import-led, given the lack of development of heavy industry primarily.
Therefore, it is important that the country should launch meaningful institutional, organizational, and market reforms, so that macroeconomic stability, and economic growth can be enhanced sustainably. This is also important to meaningfully deal with the country’s high level of debt distress, and also to significantly attract foreign direct investment.
The nature of reforms has to be non-neoliberal, especially in terms of reining-in austerity policies, along with shifting from following market fundamentalism, to ‘dual-track’ pricing policy, as was done by China. Under this policy, the country should allow market determination prices of only those commodities, which are in excess supply, and are not that important for either food security, or in terms of being used in the heavy industry, while the prices of other commodities, which are in scarce quantity, and are important for heavy industry, should be regulated by government.
Hence, Pakistan should stop following the neoliberal model of ‘price shock therapy’ and instead should follow ‘dual-track’ pricing mechanism, which will give the country a huge boost in terms of reaching sustainable economic growth, and macroeconomic stability, and break the boom-bust cycle, in which the country remains up till now. In addition to reducing income inequality, and poverty, it will also help increase economic resilience against the existential threat of climate change crisis; not to mention meaningfully decreasing an otherwise high level of debt.
China on the other hand, while coming very close to following ‘price shock therapy’ during the 1980s, did not adopt it, as pointed out in the 2021 published book ‘How China escaped shock therapy: the market reform debate’ by internationally renowned economist Isabella M. Weber as follows: ‘By the late summer of 1986, what had started under the label “coordinated, comprehensive package reform” was watered down to an adjustment of only the important and symbolic price of steel, combined with a partial tax and financial reform. In the fall, the last remnants for the shock treatment were condemned… In 1986, China narrowly escaped a big bang. Confronted with diverse, authoritative warnings about the unforeseeable risks of imposing the shock of price reform and the uncertainty about its benefits, Zhao Ziyang [the third ‘Premier of the State Council of the People’s Republic of China’ who served during 1980-87] ultimately gave up on package reform. This plan had appeared like a comprehensive solution in theory, but it proved infeasible in practice. Zhao came around to arguing that the basic challenge of economic reform was enlivening enterprises. …The first, most shocking element of shock therapy, overnight price liberalization, was aborted. Instead, the reform approach of marketization from the margins prevailed… A full-scale contract responsibility system enhancing the dual-track price system, along the lines proposed in the 1985 System Reform Institute survey, was now implemented…’
