Thread
Pakistan's economy is in deep crisis
a long 🧵
a long 🧵
The spread on $ debt (16%+) is in range where the number only matters for speculators now, the country is effectively shut off from private capital markets
Rupee has lost 20% of its value in 3 months, while current account remains negative and $ rollovers coming due
Rupee has lost 20% of its value in 3 months, while current account remains negative and $ rollovers coming due
The rot is deep, and I've spoken about the structural issues multiple times in the past. e.g.
tabadlab.com/pakistonomy-episode-04-atif-mian/
tabadlab.com/pakistonomy-episode-04-atif-mian/
I'll come back to some of the causes, and then look ahead
But first, I want to reiterate how precarious the situation is.
If assistance does not come through - starting with the IMF - the feared "doom loop" of financial markets constricting the real economy will only intensify
But first, I want to reiterate how precarious the situation is.
If assistance does not come through - starting with the IMF - the feared "doom loop" of financial markets constricting the real economy will only intensify
The issue is not "default" per se - but its terrible consequences for the people
Pakistan has left itself almost completely at the mercy of foreign assistance - this is the real sin of its political elite
Pakistan has left itself almost completely at the mercy of foreign assistance - this is the real sin of its political elite
Energy is mostly imported, medicine are mostly imported, even in food unfortunately pakistan is no longer self-sufficient
So the key issue will be "rationing", in the short run, no price can clear these markets, because Pakistan cannot produce these essentials, and who else will pay for it?
None of this is rocket science, and should have been patently evident to those in power -
None of this is rocket science, and should have been patently evident to those in power -
And this brings me to some of the recent events that have all flowed into creating the situation Pakistan finds itself in ...
of course as i said the rot runs deep and goes back a long time
of course as i said the rot runs deep and goes back a long time
The Russian invasion sent oil prices to sky rocket. But its important to keep in mind that Bangladesh buys the same oil that Pakistan does, so why is Pakistan is so much deeper trouble?
In fact, Bangladesh just lent 250M$ to Sri Lanka!
In fact, Bangladesh just lent 250M$ to Sri Lanka!
One reason is that while oil prices were going higher, Pakistan was selling some of the cheapest oil in the world domestically!
PTI government reduced price domestically and started to subsidize it. How can Pakistan pay for it? It never could
PTI government reduced price domestically and started to subsidize it. How can Pakistan pay for it? It never could
The decision to lower prices was purely political, to gain public support, and perhaps more importantly set a minefield for the incoming PMLN government
politics trumped the national interest ... and the irony is that the decision worked politically
politics trumped the national interest ... and the irony is that the decision worked politically
If PMLN were smart, they should have stepped back from the VONC .... but anyways, that's not important
It was only a matter of time that PMLN had to choose between default today or raise oil price to international level
It did the latter, and won over public's fury
It was only a matter of time that PMLN had to choose between default today or raise oil price to international level
It did the latter, and won over public's fury
One may feel a bit sorry for PMLN, except PMLN did something quite similar when they were in power the last time
PMLN deliberately kept exchange rate appreciated whey country ran deeper into bop issues ... why? because elections were approaching
PMLN deliberately kept exchange rate appreciated whey country ran deeper into bop issues ... why? because elections were approaching
PTI won, and had to face a currency crisis in its early months that was essentially PMLN's fault ...
This time PTI returned the favor
And it has happened many times before ... e.g. Musharraf regime's dying months
The politicians play politics while Pakistan burns
This time PTI returned the favor
And it has happened many times before ... e.g. Musharraf regime's dying months
The politicians play politics while Pakistan burns
When PTI came to power, it had a chance to set things right, and most important issue was (and is) to get the external account balanced
But it lacked any direction or purpose. e.g. it started with its flagship "naya housing" program.
But it lacked any direction or purpose. e.g. it started with its flagship "naya housing" program.
I talked about why it was ill-advised here
In fact, even basic numbers never added up in the naya housing program, but there was no serious thinking
In fact, even basic numbers never added up in the naya housing program, but there was no serious thinking
Then came Covid ... Ironically, Covid helped Pakistan breathe a little easier
This is a point not commonly appreciated, so i'll explain it a bit more
This is a point not commonly appreciated, so i'll explain it a bit more
One core problem Pakistan faces is that its economy is fundamentally unbalanced .. I explain the reasons for it in this discussion
www.youtube.com/watch?v=VXNL0VX-8eo
www.youtube.com/watch?v=VXNL0VX-8eo
A rise in domestic demand puts more pressure on external account on the margin ...
Covid actually helped take the pressure off external demand ... people weren't driving as much, the rich weren't flying and so on
The result was a temporary current account surplus
Covid actually helped take the pressure off external demand ... people weren't driving as much, the rich weren't flying and so on
The result was a temporary current account surplus
It was temporary though, and deeper structure imbalance was just waiting to whiplash the economy once Covid receded
You can see that by coming Pakistan's swing in current account with that of its peers
You can see that by coming Pakistan's swing in current account with that of its peers
It Pakistan's government had put in place a serious set of people in charge, such analysis would have been routine
Anyways, as soon as Covid started to recede, Pakistan's balance of payment started to worsen
Anyways, as soon as Covid started to recede, Pakistan's balance of payment started to worsen
It is important to understand that the dynamics were quite negative even before the Russian oil shock hit, the oil shock and PTI's response it only hastened the fall
I don't care about politics, certainly not the partisan kind ... but its important for the people to get the economics right, so we can diagnose the problem with a clear mind
Of course PMLN and PPP governments of the past have major contribution to the problems country faces today as well
e.g. when CPEC was being put forwarded, I highlighted why it was ill-designed (one example below)
e.g. when CPEC was being put forwarded, I highlighted why it was ill-designed (one example below)
There could have been a really fruitful China-Pakistan cooperation ... but CPEC was poorly designed
How could a country like Pakistan put on such huge foreign liabilities, essentially to fund domestic consumption?
How could a country like Pakistan put on such huge foreign liabilities, essentially to fund domestic consumption?
The math never added up, and the sad reality is Pak government never did the math (I know because I asked)
Anyways, one could keep going. But I want to now bring the conversation back to the present.
What is needed?
What is needed?
In terms of the economic steps needed, I have already talked about some of them here, so i will not repeat.
Instead, I'll talk a bit about politics ...
www.youtube.com/watch?v=VXNL0VX-8eo
Instead, I'll talk a bit about politics ...
www.youtube.com/watch?v=VXNL0VX-8eo
We can talk about what steps need to be taken, but my fear is that the politics is fundamentally breaking down
The toughest challenge Pakistan faces is bringing back some modicum of credibility - credibility with investors, credibility with its own people
The toughest challenge Pakistan faces is bringing back some modicum of credibility - credibility with investors, credibility with its own people
There has to be some minimum set of rules that everyone - the main parties, and the "establishment" will legitimately agree on
It is hard to see what that minimum core will be
because they are too eager to pull the carpet from underneath each other
It is hard to see what that minimum core will be
because they are too eager to pull the carpet from underneath each other
Just take the example of how each government has used very limited external borrowing space as a political tool, to ultimately lead the country to the precipice it's on today
This obviously cannot go on, with the people suffering even more than they already have
This obviously cannot go on, with the people suffering even more than they already have
Pakistan needs a political grand bargain. It needs to find that common space, that every functioning society needs.
That political bargain must have at least two components to make any difference
That political bargain must have at least two components to make any difference
First, the political elite have to agree to stop using the "religion card". You all know what it means. Stop using it, if you care about your own future
Second, the elite capture of economy is particularly pernicious and unproductive in the case of Pakistan.
Pakistan stands out in how poorly its median citizen fares on basic needs such as education and health, even when compared to countries with similar income per capita
Pakistan stands out in how poorly its median citizen fares on basic needs such as education and health, even when compared to countries with similar income per capita
The powerful are knee deep in unproductive, rent-seeking sectors like real estate and sugar. That must change.
The taxation and incentive structure must favor productive activities over unproductive ones - and open up the economy to women.
*the end*
The taxation and incentive structure must favor productive activities over unproductive ones - and open up the economy to women.
*the end*
Mentions
See All
Noah Smith @NoahSmith
·
Jul 20, 2022
Worth reading.