A VISIT to Karachi after nearly two years creates both a sense of nostalgia and deja vu, the former caused by memories of what this city once was and the latter by a sense of imminent danger presented by torrential rains. . These feelings can be figuratively extended to the emerging situation in Pakistan, which faces severe short-term economic challenges – capable of unleashing immense pain and suffering on a tottering population – and the increase in casualties from the attacks carried out. by the Tehreek-i -The Pakistani Taliban.

The economic situation was nothing to write home about at the start of 2020 and the onset of the Covid-19 pandemic dealt an immediate blow to an economy already on its knees. But credit must be returned where it is due: the government, together with the State Bank of Pakistan, has stepped up its game, providing a stimulus that has minimized the economic shock of the pandemic. Timely and effective public health interventions have saved Pakistan from the trauma that Indian citizens, for example, have suffered. This meant that as the closures eased, the Pakistani economy shifted into high gear.

Under the hood, however, many of the structural shortcomings that plagued the Pakistani economy throughout the 21st century remain in place: circular debt in the energy sector, a lack of export diversification, rent seeking. across industries and a continued reliance on consumer driven imports, to name a few. These problems have been exacerbated by what is now the longest-running amnesty program in the country’s history, which has diverted scarce capital into largely unproductive and speculative real estate investments. It is also worth mentioning the irony of this amnesty given the anti-corruption rhetoric of the ruling party for decades.

What should worry people is the fact that over the past 18-24 months, the Pakistani economy has become even more exposed to external shocks, mainly in the form of rising commodity costs. . They have now gathered in the form of dark clouds on the horizon and threaten to erase the small gains that have been made in recent months.

If global commodity prices remain high, Pakistani citizens will experience much more pain.

It is true that there is little that Imran Khan and his advisers can do about the sky-high prices for palm oil, crude oil, coal and natural gas. However, the sheer inability of the Pakistani state and its bureaucratic apparatus to engage in half-decent scenario planning exercises has only made the problems worse. During the global financial crisis of 2007-08, countries like Pakistan found themselves helpless in the face of soaring commodity prices. As comparable economies implemented policies to reduce their exposure to such risks, successive governments stepped on the track while doubling down on foolish policies that kept the exchange rate overvalued and further increased dependence on imports. .

Read: Inflation deserves more serious action

This government was initially expected to engage in some sort of long-term reflection, but those hopes were quickly dashed. The most recent example of a complete lack of foresight was a report highlighting how the average of imports over the past three years was used to forecast future imports, with the result that the expected number was far from reality. It was like measuring a patient’s blood pressure during sleep hours and using the data to prove that the patient had no blood pressure issues!

It is now increasingly recognized that the wheels of the economy must be slowed down. Some financial analysts believe that interest rates could rise an additional 100 basis points or even more. The 100% cash margin requirement on imported goods and the change in policy to curb car purchases also indicate that the ground is being prepared for a soft landing to stem the fall of the rupee, which has secondary inflationary effects. Interest rate hikes, however, will do little to stem rising imports and inflation, which are currently mainly driven by rising commodity prices.

Read: Can a slight increase in key rates control inflation?

The next few months before the end of the year are going to be crucial. If global commodity prices remain high, Pakistani citizens will experience much more pain. This can create a wave of short-term unrest, angering a large section of society: while the elites have made significant gains from investing in “Plotistan” and purchasing new vehicles, these citizens ordinary people find it difficult to put food on the table.

These economic problems are compounded by a resurgence of the TTP in Khyber Pakhtunkhwa which begins to inflict casualties on Pakistani forces every week. If left unchecked, these groups could soon start carrying out terrorist attacks in urban areas of Pakistan, threatening hard-won gains through immense sacrifice.

Critics will say this time is different, and they have some merit: the central bank lets the market determine its value, lax monetary policies in the developed world mean money is cheap and flowing, and Pakistan has a friendlier regime in Kabul which is unlikely to allow the TTP to regroup and wreak havoc across the border.

To successfully navigate these turbulent waters, the machinery of government must operate with immense focus, discipline and synergy under extreme stress, a quality that has been a longstanding weakness. It will also require external events to work in its favor in the form of lower commodity prices and a Taliban regime that can squeeze the TTP.

If the government falters in the coming weeks, things will start to look like déjà vu and history may start to rhyme. After all, just over a decade ago Pakistan was facing similar crises where its cities were under attack, the prices of basic necessities skyrocketed and many political leaders, including the current Prime Minister, argued for peace talks. with terrorists.

The writer is a senior fellow at the US Institute of Peace and host of the Pakistonomy podcast.

Posted in Dawn, October 7, 2021

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