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An All Too Familiar Mess

Published in Jul-Aug 2022

If Pakistan is to move beyond its systemic boom and bust cycles, it will have to completely change its economic modus operandi.

Pakistan has been journeying from one economic and political crisis to another for the last two decades. A few years of growth are followed by a period of sharp correction as the economy heats up. The frequent boom bust economic cycles are the function of an economy heavily dependent on imports. As increasing consumption is fuelled by imports, demand for foreign currency goes up and is satiated by a mix of exports, remittances and debt.  

In the absence of an export-oriented growth strategy, the increasing demand for foreign currency is met by incremental borrowing, until such time that it is not possible to borrow any more to finance an import-heavy binge. Eventually, emergency brakes are applied as the boom transitions towards a bust. It is due to these same reasons that Pakistan has had more than 23 programmes with the IMF during the last 50 years, roughly averaging a trip to the IMF every three years.

This time, the boom bust cycle has coincided with a deteriorating global macro environment, thereby further compounding the potential shocks. During the last 18 months, commodities across the board have increased multi-fold; be it crude oil, natural gas, edible oil and even something as mundane as paper. A bull-whip effect following the pandemic distorted global supply chains, eventually resulting in higher prices. Economies like Pakistan, which are heavily reliant on energy and food imports, are the most vulnerable. 

The Russian invasion of Ukraine further compounded the global macro environment as significant energy supplies provided by Russia were cut off, while Ukraine, a key grain producer, is experiencing difficulties harvesting and getting its product delivered across the world. As the price of energy and food continues to increase, vulnerable economies saw inflation reach decade-high levels. A once-in-a-decade perfect storm, if there is one, is unravelling right now. As key commodities become increasingly out of range for many countries, eventually demand destruction will take root which can have a cooling effect on prices.  

A key leading indicator of recession is the price of copper which has started to decline, suggesting that a recession may be around the corner. As key economies grapple with a recession and decades-high inflation levels, Pakistan’s exports to these countries will also be affected. How the macro situation plays out and how our policymakers position Pakistan for growth (or not) will play a critical role in charting the growth trajectory over the next decade. The era of cheap capital seems to be over for now, as economies and institutions reorient and efficient capital deployment will remain the order of the day, or the decade to come. In the local context, a mix of both tactical and strategic decisions will play a role in navigating the crisis.

Shrinkflation: Due to perennially high inflation, entities can either increase product prices, which may not be possible all the time given product elasticity, as any significant increase in price may lead to a reduction in demand or erosion of market share. 

In such price-conscious markets, entities resort to ‘shrinkflation’, which is shrinking the size of the product offering, or reducing the quality of the same by substituting key raw ingredients with cheaper variants. This ensures that margins remain intact but the overall quality of the product is permanently downgraded. This is the reason why many confectionary items produced locally, when compared to their imported counterparts, are of considerably lower quality. Consistently eroding purchasing power is to be blamed for this, which permanently downgrades the available quality in an economy.

Reallocation of Consumption: As purchasing power and disposable incomes erode in real terms, there will be an adjustment of the consumption basket from relative luxuries to essentials during the next six to 12 months. However, as inflation is fully priced in, and wages readjust, there will be a gradual shift. During this period, entities ought to focus on essentials or those with lower price elasticity and have a strategic plan for other products which would take off once the readjustment process is completed. Expecting consumption baskets to remain unchanged would certainly be a fallacy in this macro environment.

Export Orientation: There is only one way to snap out of the boom bust cycle on a macro level, and that is through the development of export capacity. It is only by developing an export-oriented industrial and service base that Pakistan will be able to ensure sustainable growth. The strategic direction for any entity should be to prioritise how it can position itself for export-oriented growth. It is only through competing in a global market that we can extract competitive advantages and enhance both consumer and producer welfare. Carving out a bigger slice of a stagnant or shrinking pie pales in comparison to having a smaller share of a bigger pie. The decades-old model of trading outposts may not be sustainable anymore as the boom-bust cycles will only get more frequent and create even bigger problems in the future. It is time not only to export but to develop global brands. A counterargument here is import substitution. 

Such a strategy does not develop competitiveness on a macro level, as the inability to compete globally hinders innovation, resulting in a gradual deterioration in product quality, higher prices, and loss in consumer welfare. Import substitution may make sense on a micro level (artisan products, for example) but it is not a successful strategy on a scale.

Taking E-Commerce Seriously: A channel often completely ignored or still considered a novelty by many organisations is e-commerce. E-commerce can potentially allow every organisation to become an export powerhouse without much investment, but that will require putting faith in technology and avoiding micromanagement. Many experiments over the last few years by local organisations have failed mainly because managers with expertise in brick and mortar have tried to replicate the same strategies in e-commerce. It is not inconceivable to expect mid to large organisations to have a presence on major e-commerce platforms globally. At this stage, every incremental dollar counts and that is additional revenue and profitability for the entity as well.

Brain Drain and Globalisation of Workforce: An adverse consequence of political and economic instability is an acceleration of brain drain, which is not really captured by any formal statistics and is mostly a function of anecdotal evidence. In a post-pandemic world, it has become easier to work from anywhere, and in areas which would traditionally not be available in a brick and mortar setup. Organisations must reposition themselves if they are serious about attracting and retaining top-quality talent, and that means allowing flexibility and transitioning towards a more task-oriented regime rather than a traditional loyalty-oriented regime. The average time spent in an organisation continues to decline as talent gravitates towards more engaging and task-oriented roles. As purchasing power declines, the exodus will only increase further. Changing nomenclature without a change in mindset is only going to expose the hypocrisy of organisations. As hyper-connectivity increases and human capital is given more opportunities, the bargaining power will shift towards employees. Retaining quality talent will only get tougher if organisations do not reorient themselves for the future.

This is not the first time Pakistan is at a crossroads. The decision that needs to be taken is whether Pakistan is ready to pivot towards sustainable, export-oriented growth and whether the private sector is ready to support this. An inability to do this will ensure that we will be back at the same crossroads within the next thousand days, or slightly more.

Ammar H. Khan is a macroeconomist.