Thread by @hasaankhawar

1/ Pakistan's Puzzling Politiconomics

PTI advancing the narrative that Pakistan’s economy is in a deep mess, blaming Dar

PML-N equally vocal in projecting Dar as the messiah for successfully sustaining $-PKR rate

Both sides cherry-picking data

But what's the reality?

2/ Two distinct patterns characterise Dar’s era as Finance Minister:

An expansionary fiscal policy focusing on infrastructure and consumption-led growth; and

An actively managed foreign exchange policy

3/ Expansionary fiscal policies aren't bad if financed wisely & lead to increased public investment

Therefore, nothing wrong with PML-N’s appetite for infrastructure

Increased government spending led to increased demand & growth

But besides assets, govt’s expenditure also rose

4/ Maintaining exchange rate, by Dar, meant spending precious foreign exchange in the market to keep an artificial supply

And in the process making imports much cheaper

No tough economic decisions on SOEs or circular debt and therefore no ripples

5/ These patterns helped Dar to keep 3 critical markers of public perception at desired levels:

Exchange rate

GDP growth

Energy prices

And he masterfully signalled & maintained a positive surround sound throughout his tenure, making stock market flourish & keeping CPEC going

6/ But these patterns weren’t without a cost

And led to ballooning fiscal & current account deficits

Rising public debt, especially foreign loans

We enjoyed subsidised imports and dividends of consumption-led growth, not realising that we’d have to pay for it later.

7/ Current account deficit, which was merely $3 billion in 2013-14, grew six times to $18 billion by 2017-18.

In the same time, our external public debt rose by $22 billion, as opposed to less than $10 billion in PPP’s tenure.

8/ PTI government under pressure from IMF:

Drastically reversed these patterns

Cut down development expenditure

Devalued rupee

& had to borrow more to retire maturing debt

Between Jun 2018-Mar 2019, external debt rose by $4 billion & overall public debt by Rs. 4 trillion

9/ Unfair to criticise the PTI government for making these tough choices

BUT

This happened too late & too fast, jolting the economy

& govt did a shoddy job in managing investor confidence

Most importantly, stabilisation may come where is the strategy for recovery?

10/ No easy choices now

Fiscal discipline at the cost of compromised growth

Massive devaluation necessary to reduce reliance on foreign loans

Fixing PSEs = privatisation, downsizing & liquidations

Addressing circular debt = renegotiating contracts to reduce capacity payments.

11/ Stabilisation will take some time & will ultimately give way to recovery

But without structural reforms, recovery would be modest

& would hardly take us another two years, before we would again be knocking at IMF’s door

Time for this hard reality to sink in

/END