Stagflation: A challenge for policymakers in Pakistan

Export-led growth strategy fails to address current economic impasse in Pakistan

Writing for The Express Tribune, author Dr. Fahd Rehman explains that Pakistan is currently experiencing political turbulence that is causing economic uncertainty. 

According to the author, the lingering political situation is leading to a cat and mouse game between opposing political parties, further exacerbating the already fragile political landscape. The government’s temporary pause in dialogue with the International Monetary Fund (IMF) is also contributing to the economic uncertainty. The IMF plays an important role in stabilizing Pakistan’s economy, and any delays or standoffs in dialogue can have significant consequences.

Furthermore, the dwindling foreign exchange reserves, which are hovering around $4.6 billion, are posing a significant challenge to the government. To maintain a minimal level of reserves, the government has imposed import curbs, which have slowed down the economy. As a result, a significant number of large-scale manufacturing plants are bound to shut down due to the shortage of raw materials and intermediate inputs.

Pakistan’s economy has become increasingly dependent on imports, as critics have come down hard on the import substitution strategy and pushed for export-led growth. Proponents of export-led growth have been maintaining this position since the 1990s when a policy shift was taken to orient the economy towards the so-called export-led growth. However, they may not have anticipated the current situation where business firms need to compete on price and quality, requiring time and effort to achieve mastery. The process of learning by doing is essential for businesses to become competitive, but it requires an enormous amount of effort, where firms act in small steps, and these steps are combined to achieve mastery.

Unfortunately, many firms fail to achieve this mastery, and only a few firms become successful in this vein. Business firms must plough back to expand and remain competitive in the globalized world. This requires industrial capitalists to focus on their core business and stay away from speculative business activities. However, the country’s industrial capitalists engage in real estate and other speculative activities, and even invest their profits in buying stocks. These quick capital gains divert their attention from their core business, resulting in a mushroom growth in housing schemes.

The unplanned growth of housing schemes has already started to create havoc for the metropolitan cities. The cities are experiencing water, noise, and air pollution, and green land is being converted into brown land in haste. There is a need to properly assess the cultivated area as food grains are not meeting the domestic needs. In addition, there is a shortage of food grains, which is making them more expensive day by day.

For instance, the support price of wheat was fixed at Rs2,200 per 40 kg in 2022, which has been jacked up to Rs4,000 per 40 kg in 2023 as the impact of devaluation of the rupee played a major role in it. The expensive food grains increase the money wage of the working class. In a labor-intensive industry, high money wages make products expensive. As a result, expensive products lose their competitiveness in a tough competitive environment.

In short, Pakistan’s economy is experiencing stagflation, where unemployment increases along with acceleration in prices. This is a complicated situation for policymakers to address, and it remains to be seen how the government will deal with this situation in the coming months. It is clear, however, that the government will need to take a comprehensive approach to address the country’s economic challenges, including the need to shift towards more sustainable and competitive business practices.

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