As the global economy finally opened up after Covid-19, a yawning gap between demand and supply started pushing inflation upwards. Even before hostilities erupted between Russia and Ukraine, inflation had reached 40-year high in the US. Because of the conflict, international energy and commodity prices started soaring to new heights. Where such high inflation impacted people in developed countries, it has been a disaster for the inhabitants of developing countries since a majority are net food and energy importers. In the case of Pakistan, the almost-doubling of the oil import bill brought a steep reduction in Pakistan’s foreign exchange reserves which, at one point, were only sufficient for five weeks of imports.
As the clouds over the Pakistani economy grew darker, Pakistan’s policymakers became squarely focused on stabilising the economy. On top of this, political instability has added another wrinkle as it has compounded uncertainty spooking markets and investors. Crucially, there is a dire need to understand that the Russia-Ukraine conflict is the beginning of what analysts are calling the Cold War II, indicating that the world will remain politically and economically unstable for years to come. As Pakistan’s economy embarks on this perilous journey, economic policymakers would be well advised to identify threats and opportunities so that the former may be avoided and the latter may be capitalised upon.
Perhaps the most urgent issue facing Pakistan is how the nation is going to regain energy sovereignty that has been compromised over the years due to importing fuels for cars and power generation. Not only has the fluctuation in the prices of imported fuels led to the current account going amok, their price and supply remain uncertain, especially as Russia may decide to stop supplying gas to Europe.
At the same time, however, the present uncertainty in the supply of imported fuels also creates a number of enabling conditions for Pakistan to switch to alternate fuel sources. The international price volatility has served to reduce opposition to “dirty fuels” like coal. Where this would enable Pakistan to channel international investment toward developing indigenous coal-based power generating units, this can only be a short-term solution.
Before long, the coal-based power generation will start exacting a substantial social cost in terms of poor air quality. Pakistan will have to channel a substantial portion of the foreign exchange saved by switching to coal as investment to develop alternate sources of energy. Switching to sources of power generation based on solar and nuclear energy remains the most viable, sustainable and green solution in the long term. Given such sources of power, Pakistan can begin switching to electric vehicles that will lead to improvement in air quality, health and overall economic productivity. To this end, Pakistan’s scientists will have to take up the challenge of building a fast breeder reactor in order to extend nuclear fuel supply for power generation.
Another important challenge facing Pakistan is the governments’ inability to bring the fiscal house in order. Fiscal slippages are partially to blame for the boom-and-bust cycle of the Pakistani economy, where every few years Pakistan lands itself in the middle of a currency crisis. Inability to raise enough revenues narrows the fiscal space available for spending on education, health and clean drinking water. Finally, repeatedly going to the IMF for bailouts also leads to compromised policy sovereignty, compelling governments to bow down to strict conditions.
There are a few short-term strategies available for getting a grip over fiscal woes. The first area of immediate reform should be the power sector. One way to address end-user losses is by making pre-paid utility meters mandatory that can only be re-charged with cards, just like mobile phones. The second area of immediate reforms involves developing a national pension fund, managed by investment professionals, that would enable the payout for the ever-increasing pension bill through market-based returns. The third area of immediate reforms involves right-sizing bloated government departments and by imposing stringent rules with respect to needless expenditures like luxury cars and foreign junkets. Taking these steps would free up between Rs700-800 billion easily, which is almost 1 percent of GDP.
Of course, there is no escaping medium-term reforms on the revenue collection side, but they are going to be a function of successful reforms within FBR as well as being contingent on the actual political economy.
The recent changes in the global order are going to have lasting impact on global politics and economics. Many countries are facing economic crises because of these changes. But, all crises are also opportunities. Now would be the best time for Pakistan’s economic policymakers to make an assessment of impending threats as well as of available opportunities.
As the clouds over the Pakistani economy grew darker, Pakistan’s policymakers became squarely focused on stabilising the economy. On top of this, political instability has added another wrinkle as it has compounded uncertainty spooking markets and investors. Crucially, there is a dire need to understand that the Russia-Ukraine conflict is the beginning of what analysts are calling the Cold War II, indicating that the world will remain politically and economically unstable for years to come. As Pakistan’s economy embarks on this perilous journey, economic policymakers would be well advised to identify threats and opportunities so that the former may be avoided and the latter may be capitalised upon.
There are a few short-term strategies available for getting a grip over fiscal woes. The first area of immediate reform should be the power sector.
Perhaps the most urgent issue facing Pakistan is how the nation is going to regain energy sovereignty that has been compromised over the years due to importing fuels for cars and power generation. Not only has the fluctuation in the prices of imported fuels led to the current account going amok, their price and supply remain uncertain, especially as Russia may decide to stop supplying gas to Europe.
At the same time, however, the present uncertainty in the supply of imported fuels also creates a number of enabling conditions for Pakistan to switch to alternate fuel sources. The international price volatility has served to reduce opposition to “dirty fuels” like coal. Where this would enable Pakistan to channel international investment toward developing indigenous coal-based power generating units, this can only be a short-term solution.
Before long, the coal-based power generation will start exacting a substantial social cost in terms of poor air quality. Pakistan will have to channel a substantial portion of the foreign exchange saved by switching to coal as investment to develop alternate sources of energy. Switching to sources of power generation based on solar and nuclear energy remains the most viable, sustainable and green solution in the long term. Given such sources of power, Pakistan can begin switching to electric vehicles that will lead to improvement in air quality, health and overall economic productivity. To this end, Pakistan’s scientists will have to take up the challenge of building a fast breeder reactor in order to extend nuclear fuel supply for power generation.
Another important challenge facing Pakistan is the governments’ inability to bring the fiscal house in order. Fiscal slippages are partially to blame for the boom-and-bust cycle of the Pakistani economy, where every few years Pakistan lands itself in the middle of a currency crisis. Inability to raise enough revenues narrows the fiscal space available for spending on education, health and clean drinking water. Finally, repeatedly going to the IMF for bailouts also leads to compromised policy sovereignty, compelling governments to bow down to strict conditions.
The second area of immediate reforms involves developing a national pension fund, managed by investment professionals that would enable the payout for the ever-increasing pension bill through market-based returns.
There are a few short-term strategies available for getting a grip over fiscal woes. The first area of immediate reform should be the power sector. One way to address end-user losses is by making pre-paid utility meters mandatory that can only be re-charged with cards, just like mobile phones. The second area of immediate reforms involves developing a national pension fund, managed by investment professionals, that would enable the payout for the ever-increasing pension bill through market-based returns. The third area of immediate reforms involves right-sizing bloated government departments and by imposing stringent rules with respect to needless expenditures like luxury cars and foreign junkets. Taking these steps would free up between Rs700-800 billion easily, which is almost 1 percent of GDP.
Of course, there is no escaping medium-term reforms on the revenue collection side, but they are going to be a function of successful reforms within FBR as well as being contingent on the actual political economy.
The recent changes in the global order are going to have lasting impact on global politics and economics. Many countries are facing economic crises because of these changes. But, all crises are also opportunities. Now would be the best time for Pakistan’s economic policymakers to make an assessment of impending threats as well as of available opportunities.