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Econ is one subject where everyone is an expert. Take for instance the opinion how PTI has destroyed Pak’s economy. A deep dive into numbers tells a different story. A look at Real Effective Exchange Rate (REER) tells you one can’t dodge death so to speak.
Note the deterioration in REER in 2017/18 was the highest it’s ever been. Every single time REER has gone up, deval has happened one way or another. You can either delay it or do it gradually, but the grim reaper is always hot on your tails. What’s the reason you might ask?
Ballooning trade def is definitely one. 5yrs of PML’n gov produced record current account def which basically means reserves were running out fast. We were told they were investments and the economy would pay for it self in the future with growth.
But how does one pay for imports and these ‘investments’ into shiny metros when the central bank can’t print USD? You borrow of course. PML’n gov was already in discussions for an IMF program in anticipation of the impending BOP crisis.
A look at net SBP liquid reserves (total reserves minus SBP swaps) tells us we have been here before. Econ analysts have told us that the situation was pretty much the same for PTI as was for PML’n in 2013.
But how is an economy supposed to manage a nearly $20bn deficit on less than $5bn reserves? You obviously can’t. SBP does not have access to swap lines with the FED nor can it print/borrow USD. For the currency not to crash completely is a minor miracle itself.
At that point for the currency to devalue rapidly is not a question of choice but a foregone conclusion. The pace of deval causes instant high inflation since we import everything under the sun. Going to the IMF also is not a case of if but when.
An IMF prog itself doesn’t cause inflation. Raising interest rates and letting the currency find its equilibrium are just some of the tools SBP uses to manage the crisis created over a number of years.
Most analysts don’t even know it takes 2 years for central bank policy to affect change. Quick search of major central bank websites will tell you that explicitly.
Make no mistake the crisis left behind by the previous gov was of epic proportions. For a poor country like Pak to go through this shock therapy and to beg and bow before mad Middle Eastern dictators for crumbs should be a matter of shame for all of us.
For the economy to be teetering still after a double shock of covid should not be surprising for anyone. Gov challenges will always remain unless the gov realises it has no business doing business. Who can forget this gold from the beacons of competence. https://www.dawn.com/news/1159494
Excellent article explaining the record mismanagement and a trail of incompetence left behind by PMLn. Q to serious analysts - is this what competence looks like? https://twitter.com/javedhassan/status/1334732658455220224
