Pathways to growth.

TWO very different narratives regarding the state of the economy are currently in the field. The government as well as the central bank are emphasising that the external account has stabilised, the economic crisis has dissipated and the economy has 'turned the corner'. Most independent commentators, media and the public are complaining about high inflation, businesses going under and rising unemployment. Both these narratives are not completely wrong (though one is partially correct and the other entirely so).

How does one reconcile these two apparently conflicting views? I had presented a framework to do so in my previous article in this newspaper [State of the economy]. The 'shock wave' from the balance-of-payments crisis that Pakistan experienced last year first moved from the external account to the asset markets (currency, stocks, real estate), and then, within a few months, got transmitted to the real sector of the economy - businesses, factories, retailers etc. Its effects are now moving to the banking system, as anticipated.

When stabilisation begins to take place, the process works in the same order. The external account stabilises first, with foreign exchange reserves and the currency stabilising, followed quickly by the asset markets. The real sector, however, takes a longer while to recover. How long the recovery takes depends on the severity of the crisis and the corresponding 'dosage' of the policy measures adopted.

In short, the economy consists of many moving parts - and the government is talking about one of them, ie the external account. Everyone else, however, is exposed more directly to how private-sector businesses and individuals are faring on a daily basis, and how each is trying to cope with high inflation, loss of income, lower purchasing power and joblessness. Hence, there is an obvious disconnect as the government and the people are looking at different parts of the picture.

Despite the fiscal straitjacket there are potential avenues to growth.

The silver lining is that stabilisation of the external account is a necessary condition for the economy to turn the corner from the crisis, and the more it takes hold, the closer Pakistan will be to seeing economic activity bounce back. However, stabilisation on its own is not a sufficient condition for growth.

Reviving economic growth will require robust policy action in the area of structural reform. Indeed, many of these reforms on the taxation side or documentation...