Pakistan's economy is going off the rails, a top economist said earlier this week, after looking into some economic data like imports, exports, and inflation. Atif Mian, a professor of economics and finance at Princeton University, compared the cash-strapped country's economy with India and Bangladesh. He found that Pakistan's exports were declining, inflation was rising at a dangerously high level, and there was no confidence among the investors in the current government led by Prime Minister Shehbaz Sharif.
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On exports, Mian shared a chart comparing Pakistan's numbers with that of India and Bangladesh. He said there was a global surge in exports post-Covid, but around the second quarter of 2022, Pakistan's exports drop off relative to India and Bangladesh - and the gap is now over 20 per cent. "This happened despite the large currency devaluation and all "efforts" to boost exports given the severe balance of payment issue," he wrote on Twitter.
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The economist, who hails from Lahore but lives in America, said the export drop likely reflected serious supply-side disruptions in the economy. He blamed the government for its inability to get into an agreement with the International Monetary Fund (IMF), which has withheld a tranche of $1.1 billion of the bailout package. Islamabad desperately needs this money as it has been running low on foreign currency, which has forced the government the cut imports.
The other day it was reported that almost all of Pakistan's 30 mobile phone assembly units were shut down as manufacturers ran out of raw materials due to import restrictions. As forex depleted, Pakistan resorted to cutting imports to save whatever reserves it had. But these import curbs have now created a huge shortage of materials needed to run industries.
Mian has in the past blamed former Prime Minister Imran Khan for the current crisis as he delayed some of the tough measures he needed to take to secure funds from the IMF. But, the economist said, what the current government had done was on another level. "It removed CB (central bank) governor with no plan in mind, started in-fighting against its own FM (finance minister), and ultimately replaced him with a close relative of the PM - competence be damned," the economist said.
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"What followed has eroded any remaining confidence in the system," he said, referring to current finance minister Ishaq Dar's repeated assurances that a deal with the IMF is coming. "Repeatedly claiming that IMF agreement will be signed "next week".... and then crickets...This is how a country loses credibility - a feeling that either nobody is in charge, or those in power have no idea what they are doing," Mian said.
The economist further said that all this has led to a negative supply shock in the midst of a full-blown currency crisis. "When both demand and supply shrink, it's not a pretty dynamic... and this is what Pakistan is witnessing today, the drop in exports highlights the negative supply-side shock," he added.
Mian also shared a graph showing imports by India, Bangladesh, and Pakistan. The graph shows a sharp decline in imports by Pakistan from the second half of last year. Bangladesh, too, has recorded a marginal decline in its imports while India has fared better than bo the neighbours.
"All this shows up ultimately as rapidly rising inflation - see Pakistan's price level below relative to Ind/Bangladesh. It is off the charts, and extremely dangerous...millions are falling back into poverty. Large deficits and constricting supply is a recipe for hyperinflation," the economist said, sharing another graph showing a sharp spike in inflation in Pakistan. He said the exchange rate, too, will naturally mirror the price level - "it's a law of nature: you cannot "control" the exchange rate, at least not with this level of incompetence".
Pakistan's inflation surged to 31.6 per cent in March, the highest in its history. And this is expected to rise further, as there is no sign of any possible deal with the IMF.
Targeting the government for failing to restore confidence, the professor said one of the most important aspects of policy-making was to provide confidence in the system - that people can invest in the long-term for a better future. "That confidence is now missing," he noted. "I've said before that Pakistan's *nervous system* is fundamentally broken - that combination of administrative and political structures that guarantee a certain level of confidence in the economy. The country must begin to build a functioning nervous system...somehow," he concluded.
Meanwhile, Finance Minister Ishaq Dar has cancelled his trip to Washington for the spring meetings of the IMF and World Bank. He said it was done on the prime minister's orders due to the political turmoil in Pakistan.