Pak economy approaching depression from constant recession

By Mansoor Ahmad

LAHORE: The incapability of the economic planners to act discreetly in time is pushing the Pakistan’s economy from recession to depression calling for out of book strategy to keep the economy moving.

Economists point out that both the government and central bank have been ineffectively fighting to hold the inflation for the last 15 months by raising the interest rates. They point out that the country suffered from stagflation and required altogether diverse approach to keep the economy sailing.

The simple description of stagflation is a sluggish economy coupled with price inflation says senior economist Naveed Anwar Khan, FCA. He said in stagflation the prices go up while the economy goes down. He said under normal circumstances inflation heats up the economy, adding that in a heated economy the central banks are warranted to increase interest rates to cool it down to rational level but in stagflation the usual method of raising interest rates do not help the situation. The only reason it helps in times of high economic activity is because it slows the “velocity of money” or the speed at which it changes hands, he added.

Naveed pointed out that when the economy is sluggish inflation usually is also low and standard remedy overseen by the central banks is to lower the interest rates to stimulate the economy. Regrettably he added it is unfeasible to stimulate the economy by lowering rates while concurrently fighting inflation.

He said the plan for economy during stagflation is different. He said during course of stagflation the government and central banks know that interest rates are not the problem but it is the money supply that keeps inflation high in slow economy. It has to decrease the money supply and get the economy back on a firm footing. He said the central bank unfortunately failed to force the government to reduce its borrowing to contain money supply.

The inflationary pressure created during the decline in economic activity was partly due to high borrowing of the government from the State Bank of Pakistan and partly due to unbridled money creation, and rupee devaluation compared to the other currencies, says Asif Ali Shahid, Canada based charted accountant.

This he added has caused prices for food and energy to skyrocket. He said on the deflationary side we have the industrial downturn, energy and power crisis which is plummeting liquidity for banks as well as causing real estate prices to fall.

There is no doubt that Pakistan’s economy is in depression since the start of 2008 says Faisal Qamar a Dubai based chartered accountant. He said the recession has now got out of hands and by all counts Pakistan is now facing economic depression. He said technically a country is in depression when the decline in its real GDP exceeds 10 per cent or a recession that lasts for more than three years.

He said Pakistan is close to its third year of recession calling for evolving depression specific economic policies. He said non-depression economics shuns fiscal policy, on the grounds that central banks’ tools are powerful enough and their decision-making more effectual and technocratic than that by legislatures. But in today’s customary conditions, we cannot afford this perception. The economy needs fiscal incentive that could be provided by first taming inflation by curtailing huge government borrowing.

Source: The News International, 6th January 2009


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