Bad macroeconomics.

OUR current economic crisis is as much a result of external shocks as our lack of understanding of macroeconomic dynamics that have caused frequent changes in Pakistan's growth path.

Indeed, this lack of understanding has led the economy to move in stop-go economic cycles at regular intervals; in fact, the growth cycles have become more frequent, resulting in the significant lowering of average growth since 1988. Why has this happened?

As to the factors behind the growth slowdown, there is broad agreement - low levels of saving and investment and lack of political will to carry out basic structural reforms to increase revenues, break the stranglehold of monopolies, and foster competition and productivity growth, including the removal of trade barriers. In the absence of reforms, the challenge then is to manage the economy within the resulting structural constraints which impose limits on sustainable growth.

To take an example: in 2008, the economy faced a severe foreign exchange crisis, with strong concerns of default. In came the IMF to suggest a sharp reduction in the fiscal deficit to stabilise the economy. It projected that the economy would slow down after stabilisation measures to 3.5 per cent. In fact, it crashed to 0.5pc with unemployment rising sharply and food inflation standing at 21pc (as subsidies were slashed). This was the worst 'hard landing' we had ever witnessed.

We are heading for another hard landing.

The macroeconomic framework under which the budget of the new coalition government has been prepared appears to be suffering from the same malaise. It wanted to match the PTI's impressive growth performance of near 6pc over the last two years but saner counsel prevailed and it opted to target a growth rate in 2022-23 of 5pc. The government will be lucky if it achieves 3.5pc to 4pc on the current policy package. In all probability, this rate will fall even further after the stabilisation squeeze it has agreed to with the IMF. Inflation, too, will be much higher than the targeted 11.5 pc and may rise to near 20pc in the next six months. Interest rates will rise further. Ambitious revenue targets will dampen growth and cause inflation to escalate.

We are heading for another hard landing. It will take all the finesse the finance minister can muster to get the IMF to soften its stance - which, unfortunately, it rarely does. What it will agree to are additional resources to cushion the impending stagflation in the form of...