The Groundhog Day conundrum – is the economy stuck in a loop?

Well what if there is no economy. There wasn’t one before

In the 1993 cult classic, Groundhog Day, Bill Murray being protagonist of the movie re-lives the same day again, and again, in a loop.  It is estimated that he re-lives the same day 12,395 times, or just sixteen days short of thirty-four years.  Every day the protagonist wakes up, he lives the same day on a loop.  

Pakistan’s economy also seems to be following some iteration of a sovereign groundhog day.  There is a political crisis every few years, which is followed by a balance of payments crisis, an organic, or a propped up regime change, and then a tour of friendly, and not so friendly countries for some concessional loans, or dollar deposits.  The same loop is repeated every few years.  Pakistan has approached the International Monetary Fund (IMF) for a standby arrangement, or extended fund facility at least twenty-two times during the last sixty-four years, bringing our groundhog day to a sweet average of three years.  The same story repeated every three years, with little-to-no reforms conducted in-line with the spirit of the program.

The recent crisis has similar ingredients, a politically motivated subsidy which encouraged demand for fuel in a supply stressed market, a regime-change during a tumultuous economic period, and a new government which is running around like a headless chicken.  As the political musical chairs continue, the country continues to suffer as a global commodity super cycle ramps up expected inflation, and eventually interest rates, while the government actually struggles to govern. 

The friendly countries who either supply us with energy, or have friendships as high as the Himalayas, have also figured the three-year groundhog day pattern, and have started to either politely decline requests for fresh facilities, or rollovers, or have made their support contingent on continuation of the IMF program.  All roads lead to the IMF, as they have for the last sixty-four years.

Pakistan continues to be a consumption driven, and import fueled economy despite multiple prescriptions for structural reforms.  Heavy dependence on imported energy, and more recently imported edibles despite being an agrarian economy has further made the balance of payments position susceptible to the global commodity markets.  A fiscal deficit which is rarely tamed, and an incentive structure which largely awards rent seekers continues to move capital from productive export-oriented endeavors to informal non-productive activities.  A low investment to GDP ratio, and consequently sluggish growth in productivity over the last two decades are all symptoms of an economy which is either being fueled by borrowed foreign currency, or through largesse of one friendly country or another.  A monetary structure which subsidizes cost of capital for the rent-seeking elite without having in place any mechanism for penalties in absence of targeted growth continues to fuel inflation for rest of the country.

The groundhog day is here to stay.  Over the next few weeks, we may eventually see subsidies on fuel being eventually removed, which would lead to second and third rounds of inflation as price levels across the board increase.  As global food prices continue to increase, we will find it increasingly difficult to ensure affordability of basic staples given our ever increasing reliance on imported edibles.  The usual panacea is of structural reforms, but that has not worked in the last sixty-four years.  The way things are going, the groundhog day may continue for the next sixty-four years or even more.  Countries are transitioning away from one state of development to another, but in absence of a productivity oriented outlook, we seem to be largely comfortable with repeating the same loop every few years.  A monetary boost induced high growth, fueled by imports, followed by an up-tick in inflation, a twin-deficit, and a monetary contraction resulting in growth lower than the population growth rate.  Rinse and repeat.

Every day in the cult classic starts with the radio playing, I Got You Babe by Sonny & Cher.  If we continue on this track, a time will come where we may not have any friendly countries to say I Got You Babe.  Repeating like a broken record, it is time to change orientation of growth, and focus more on investment and export driven growth, else we may have to live the groundhog day till infinitum in the multiverse. 

Ammar H. Khan
The writer is the chief risk officer for Karandaaz Pakistan, an organisation that seeks to promote financial inclusion in Pakistan. He has previously worked at several financial institutions in Pakistan, both in commercial banking and capital markets


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