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Atif Mian, a noted Pakistani-American economist and currently the professor of Economics, Public Policy, and Finance at Princeton University, has said that Pakistan’s economy is under a “perfect doom loop”, remarks that come as Islamabad looks at administrative restrictions to curb its bulging import bill.

In a series of tweets on accounting versus economics, Atif, who also serves as the Director of the Julis-Rabinowitz Center for Public Policy and Finance at the Princeton School of Public and International Affairs, identified a list of problems that have emerged due to government intervention in restricting imports, using administrative actions.

SBP governor hopeful of foreign exchange inflows in coming days

“When you try to cut imports through administrative restrictions, you essentially open multiple auction markets where some bureaucrat decides what is ‘essential’ and what is not. It is a recipe for corruption and for gatekeepers to get rich quick,” he said.

“A restriction on imports … will inevitably strike at the heart of ‘production networks’. For example, if an exporter cannot import raw material, or an intermediate input for production - the entire export chain will break down,” said the economist.

Despite imposing stringent import curtailing measures, such as restrictions on Letters of Credit (LCs), Pakistan has been unable to curb the outflow of US dollars, whereas inflation continues to tread well above the 20% level.

On the other hand, the shortage of much-needed dollars is leading to a shortage of essentials i.e. pharmaceuticals, energy, food items, and has given birth to an illegal market of foreign currency.

Atif in his tweet thread shared that the multiplier effects of disruptions in these production networks are "quite large".

“So now you have a situation where your attempt at closing the trade gap has led to (a) reduced economic output, and (b) further pressured balance of payment as exports will start drifting down.

“But this is not all, there's more pain to come,” said the economist.

He said that the original problem of Pakistan is its rising twin deficits i.e. deficits in the balance of payment, and deficits on the fiscal side.

“What happens when growth slows down due to reduced economic output?

“A well-known fiscal math fact is that tax revenue is quite elastic to growth, but fiscal expenditure is not. In plain English, when growth slows, your tax receipts go down, but you still have to pay the salaries and service the debt

“So when supply (growth) shrinks and deficits rise, you will see, (c) stronger inflation,” he added.

The economist said that at present, Pakistan economy is facing three major challenges i.e. falling growth/output, continued balance of payment pressures, and stronger inflation.

“But, there is yet more pain to come,” Atif warned.

Summing up one of Pakistan's worst economic crisis

He said that the import-curtailing administrative actions were deemed "necessary", because it was afraid to devalue the currency.

“So now you have (a), (b) and (c), while having a large black market exchange rate premium,” he said.

The economist said that the government cannot sustain the unsustainable, and eventually the exchange rate will snap.

“So in anticipation, FDI (Foreign Direct Investment) dries up, domestic investment dries up, there is capital flight, there is hoarding of dollars, domestic liquidity dries up ...

“This gives you, a perfect doom loop,” said Atif. “So a policy that started with ‘plugging an accounting hole’, ends up doing very serious - and totally avoidable - damage to the economy.

"The damage will last years. For a real-world example of such policies in action, see my homeland,” he concluded.

Pakistan is currently in the midst of a financial crunch with policymakers running from pillar to post to secure additional funds for a country reeling from flood disaster. Authorities in Islamabad and the International Monetary Fund (IMF) are also engaged in discussions over the 9th review of the Extended Fund Facility. However, the talks have remained stalled at the ninth review, with prior conditions remaining the bane in progress.

Experts have called for a quick revival of the IMF programme as foreign exchange reserves deplete to a level that covers less than a month of imports.

Comments

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HashBrown® Jan 20, 2023 06:47pm
Atif Mian is one of the most renowned upcoming economists in the world; his vision and depth of knowledge would have been indispensable to Pakistan had he been on the Economic Action Committee. Unsurprisingly, though, he was judged on his faith rather than his ability and was subsequently removed. Now, mashallah, we are left only with pious Muslims in charge of our finances - which will be a great comfort when they drive us into debt and oblivion with their incompetence and lack of vision.
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questionnmarkss Jan 20, 2023 07:29pm
it does not matter how many great economic experts you have, if there is no political will then you will stay in the same shithole
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TimeToMovveOn Jan 20, 2023 07:47pm
Lets think about Atif Mian for a second. This guy went to MIT. Teaches at Princeton. He is one of the best economist in the world. A son of Pakistan soil. A patriot. His fault - he is a Ahmadi. He has no role in Pakistan. Is it any wonder why the country is in this shape?
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Haroon Jan 20, 2023 10:39pm
Issue really is we do not have an independent State Bank even after the State Bank Act. Jameel Ahmad is Dar Sb's puppy. Reza Baqir was and is the man for the job.
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samir Jan 20, 2023 10:51pm
He's just an intellectual who always keep bad mouthing pakistan doesnt have any real skills in my opinion. We dont need advice on how to run our great nation.
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Naqvi Jan 21, 2023 12:53am
The best possible reply: بے شک الله کسی قوم کی حالت نہیں بدلتا جب تک وہ خود اپنی حالت کو نہ بدلے ۔( القرآن) الرعد : ۱۱
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Arun1 Jan 21, 2023 04:39am
Nowhere does he mention the main cause. The horrendous increase in population from 35m to 220m and increasing by 25m an Australia every five years.
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Abdul Rehman Jan 21, 2023 12:33pm
Happens when economic hitman are at work. Unfortunately not the first time but 3rd time same guy same policies.
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Faisal Muhammad Baloch Jan 21, 2023 01:39pm
Such a level headed, progressive and world class economist. Who became victim of religious politics. No wonder Pakistan is the victim now.
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Asad Rizvi Jan 21, 2023 04:25pm
It is the same formula that has been used for 5-decades. Pakistan has contacted the IMF 21 times thus far, with each visit lasting an average of 2.75 years. Every administration comes to the same conclusion that the previous administration was at fault. Techniques or procedures for fixing problems have never been developed. The nation is experiencing a severe economic downturn as a result of a lack of capabilities. Nothing will ever change without major reforms or structural changes in the industrial, manufacturing & tax sectors. Rest is all talking that will not fetch desired result. Nation will need to act & think beyond the box.
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I K Jan 21, 2023 05:31pm
Charter of Economy is the answer
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Kashif ALI Jan 21, 2023 11:38pm
His words are biblical. Religion and State must be kept apart by miles for resolution of our chronic issues. Population bomb is wreaking havoc with economy in its own dynamical way. It is so clear that all political parties have kept their political interests higher than Pakistan and her economy. This can't be accepted at all. We need technocrats and a long term economic surgery to kill the malaise. Doctors and surgeons become indifferent and immune to psychology of a dying person. They focus on his revival by whatever means - tough, expensive and painful. (my three sisters are specialist doctors). Technocrats will have to behave in the same way just like doctors. They have to be indifferent to issues of public at large because the Country's economic revival needs a major surgery by taking right, logical, prudent, beneficial albeit tough, expensive and painful steps. NO OTHER WAY OUT!!!!!
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Asad Ur Rehman Jan 22, 2023 12:05pm
Reasons behind migration of local Pakistani citizens are brain drain, what about Dr Atif Mian migration.? #Religious_extremism
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dr.fahad Jan 23, 2023 03:55pm
@questionnmarkss, its not about political will . problem is Pakistan is producing 6 million babies a year . its near to impossible to manage that much population growth . from 30 million population at 1945 now we are standing at 240 million . so we have net increase of 210 million people .
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