I am deeply disturbed by the state of our society. Suicides due to poverty, deaths by stampedes at wheat distributions and mothers offering children for sale might not seem to be significant enough to merit the attention of our leaders however; these incidents show how alarmingly dire the economic situation has become. I am concerned that adhering to the policy directions of IMF might ensure that Pakistan continues to get further loans and avoid a default on its accumulated foreign debt commitments; however, these policies will put our whole society at the peril of a breakdown.
Curtailing government discretionary expenditure, deepening the tax net, reduction in subsidies on electricity and energy, depreciation of currency and build up of foreign reserves are economic policies whose only goal is to ensure that the government has enough money to avoid, or at least postpone, default on its external debt commitments. Not surprisingly, this is the economic policy which has been enforced by IMF and is reflected in the current budget. Failure to comply with these policy dictums would lead to suspension of further loan tranches while I believe that following these policies makes us vulnerable to bigger risks to the very existence of the current government, our society, and even the country. Economic instability, inflation and unemployment are the biggest threats to Pakistan and the people of Pakistan.
Inflation has persistently remained above 10% for the last three years and sufficiently proves the sheer impotence of the State Bank of Pakistan. Monetary policy has lost all credibility and consequently, inflation expectations have become deeply entrenched. This is even alarming since, right now, the global commodity prices are much lower than their historical levels. What will happen to domestic inflation when global prices of essential commodities like oil, rice and sugar rise again? The outlook seems grave indeed.
Monetary tightening – the ultimate tool with the central bank to curb inflation – seems to have backfired completely. Raising interest rates not only completely failed to control inflation (since the rise in prices was initially mainly due to global commodity prices), it further exacerbated the situation by increasing the cost of doing business instead (which in a monopolistic economic structure is merely passed through to customers leading to more inflation), and created a credit crisis in the economy. Double whammy!
If we thought things could become worse, IMF pressurised the policy of further exchange rate devaluation. Since 2008, the Pakistani rupee has depreciated by 37% against the US dollar! This means that just because of the exchange rate, the costs of imported goods (which include agri-commodities and oil) in Pakistan spiked. This may have helped in reducing the trade deficit but only by reducing imports by making them more expensive (and consequently stalling all industrial expansion in the country), and not by increasing exports. The key goal which this policy of depreciation achieved was only to make sure that Pakistan’s foreign exchange reserves don’t get depleted and consequently, we have enough money in our kitty to be able to pay back the loans from IMF. What is the use of $15bn in reserves if it cannot be used for the welfare of people? If financial austerity is such a wise economic policy, why are the indebted European countries like Greece, Spain, Italy and even the UK finding it so hard to impose fiscal restraints? Social welfare is important in Europe but deserves no attention for Pakistan?
The first thing I learnt from reading Bertrand Russell as a child was that extreme poverty leads to extreme thoughts. The mushrooming of madrassas and rise in fanaticism is a direct outcome of the rising poverty and food insecurity. The religious seminaries have developed as an alternative and more viable social welfare network and madrassas offer free food. Better to be well fed and in a madrassa than be poisoned by your own mother!