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ARTICLE: PTI government's first year was all about bringing the struggling economy out of the woods. The initial economic team was changed at the tail end of the first year when the IMF program was signed. The second year started with austerity - policy rate going up to 13.25 percent and currency level at 164 against USD in July 19.

That was the time of turnaround for sentiments in currency market. Higher rates curbed demand. Imports finally started to fall and the current account deficit was arrested. The flexible exchange rate regime was established (one of the best steps in PTI's two years). With current account slippage reduction and foreign portfolio flows in the government debt market (hot money), the currency started appreciating.

The flexible exchange rate and higher interest rates policy by SBP were widely criticized and mass media started linking this to hot money inflows. The regime was changing; and change seldom comes without criticism. The higher rates were tough for leveraged businesses, and they kept on lobbying to lower the rates.

Imports based on historic moving averages were reaching an inflection point in Nov-19. This was supposed to bounce back - with or without lowering the rates. This was happening till February. On the other hand, exports were constrained by the capacity and many textile players were operating on full capacity. Some were expanding; but others were wary of energy rates going forward.

Then covid hit. Earlier, it was thought as the last nail in the coffin of poor PTI's performance. But it seems that the tide is turning the Captain's way - just like it had happened in a rain affected match against England in the 1992 Cricket World Cup. The first ease PM got from the IMF was on quickly moving from contracting to expansionary monetary and fiscal policies. Prior to COVID, construction package (including amnesty) was hanging in balance; as despite efforts, IMF was not giving a green chit on it. PM got direct consent from MD IMF as a stimulus response to the pandemic.

In early days of COVID, everything was going wrong. Hot money evaporated in no time. Exports fell to half in April. There were no car sales in the time of lockdown and the list goes on. But later, hot money was replaced by concessional financing by multilaterals - IMF, WB, ADB etc. The interest rates came down from 13.25 percent to 7 percent in a matter of months. The highlight of the fiscal stimulus packaged announced by the PM is the Ehsas programme. It's probably the best performer in the second year of PTI. Ehsas is much beyond the rebranding of BISP. Extensive database of NADRA was used. Deserving people across the Pakistan received the handout - reaching 10-12 million poor. The impact of this money on generating demand is significant.

The real booster was a reversal in COVID cases. The PM was adamant to not go for full or abrupt lockdown. The numbers are now on his side. The low rates, construction package, initiation of CPEC phase 2 along with falling COVID cases boosted the sentiments. The stock market was quick to recover from the lows. Real estate market has got a new lease of life. Urea sales reached all-time high in July, demand has started to resurface in auto sector, cement and steel sales started picking up fast and textile exports are picking too. The fear was that remittances may fall, however, to-date, they are raking up monthly highs every month.

The tide is changing. Businesses are now thinking about investment. Not to mention that SBP concessionary finance and timely deferment of principal repayment is now paying dividends. Many businesses did not fire people because of low rate of finance for employees' salary. SBP in early days of COVID came up with concessionary finance for long term investment. At that time, every-one was saying that no one would take this. Now industrialists are thinking that this limit may exhaust soon and SBP may have to put more money in the kitty.

The construction package is seemingly giving an initial push to the economy to generate mass level employment. The good thing is that the government is trying to address both supply and demand side issues in low cost housing. Amnesty scheme and fixed tax rate regime is heaven for builders. Interest rate subsidy, upfront principal payment subsidy and first loss guarantees are making demand possible for target market. This may give an initial push; but issues like foreclosure, clarity in land titles, and regulation of builders and developers (by making RERA) is imperative. But construction is not a long-term solution - it's a stop gap thing.

The key is not housing; but manufacturing and expanding services businesses. For that, the energy problem has to be tackled. Fiscal problems cannot be dealt with in the absence of circular debt reduction. Energy prices cannot be affordable without fixing energy woes. It's the single biggest enemy of the economy; and the country cannot come out of its boom and bust cycle without it. IMF progarmme is stuck, after two reviews, on the resolution of the circular debt.

The second year is ending with some real efforts on the energy front. MOUs are signed with 2002, 1994, in renewable 2006 policy - wind and bagasse. This is to be followed with new rates for government own plants, and perhaps some negotiation with Chinese at the highest level. The government is coming up with a road map for energy resolution. It is key for the economy to grow.

All these factors have created a feel-good factor; and that is imperative for investment. Now SBP is eyeing expats through introducing Roshan digital account. There are improvements on FATF and day is not far before we come out of the grey list. There is some merit-based appointments in key departments. The third year is important; if the reforms continue, and confidence is boosted, the economic momentum will continue.

Copyright Business Recorder, 2020


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