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The Impolitic Economic Policies of Pakistan

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The season of rate hikes and policy tightening is in full swing around the globe. The latest 50 basis point hike by the Federal Reserve jolted emerging economies as investors rushed across the Atlantic. Now, with subsequent similar increments planned throughout this year, the federal funds rate – the overnight interbank borrowing rate – is likely to climb above 2% by the year-end. Naturally, developing economies are following suit to prevent the egress of foreign investment and ease the bite of inflation cruising the surge in the US dollar. Pakistan is no different as it continues to chase stability in an inherently unstable environment. The conflicting geopolitical variables, internal political drama, and illogical economic policies – a confluence of these factors is pushing Pakistan into the abyss. Nonetheless, misery is avoidable if prudent policies get implemented – and fast!

The recent decision by the State Bank of Pakistan (SBP) to hike the benchmark interest rate by 150 basis points to an 11-year high of 13.75% is wielding a mixed impact. On a positive note, the decision is in-line with the market expectations predicted by expert economists. Thus, the markets have already adapted to the announcement – avoiding consequent volatility. Moreover, the rate hike is a central step to harness inflation – spiking to a 30-month high of 13.8% in May. Nonetheless, the SBP has increased the policy rate cumulatively by 675 basis points since September 2021. Still, inflation has lingered in double figures – climbing from 11.5% in November to 13.4% in April. While it is premature to claim that a hawkish policy is radically futile, tightening interest rates is not enough to grapple with the existing economic woes.

The searing inflationary pressure in Pakistan is mainly due to the geopolitical tensions in Europe. The Russian invasion and the retaliatory sanctions from the West have rilled the global commodity markets. Russia and Ukraine (combined) account for almost 30% of the global wheat supply. The Ukrainian seaports in the Black Sea – currently blockaded by Russian forces – are crucial to worldwide exports. And containment measures inflicted on the Russian economy are fanning prices of staple commodities like wheat, corn, and seed oils. Even global reluctance to trade with Russia – one of the biggest energy suppliers in the world – has bumped crude and gas prices into the abnormal territory. Cargoes of Liquefied Natural Gas (LNG) – initially bound for Asia – have redirected to Europe to replace millions of tonnes of gas imported from Russia. And as I’m writing this article, the Brent benchmark is rallying over $120/barrel – up from around $60/barrel last year. As a result, inflation in Europe has breached 9% year-on-year while the Consumer Price Index (CPI) measured US inflation clocked at a four-decade high of 8.4% in April. As LNG trades at a premium and crude prices continue to persist in triple figures, how can Pakistan – an energy importing nation – evade the brunt of imported inflation?

Pakistan’s import bill is weighted heavily apropos of petroleum imports – constituting roughly 25% of the total outflows. Imported furnace oil makes up about 31% of Pakistan’s energy mix crucial for electricity production. The sky-high fuel prices have already pushed the oil and petroleum import bill over $20 billion for the first ten months of the current fiscal year – more than double compared to the same period in 2021. With no sign of easing tensions in Ukraine, and Europe discussing options to impose an embargo on Russian energy imports, Pakistan’s trade deficit is likely to breach the $50 billion marker by the culmination of this fiscal year. Yet, growing exports and record-high remittances have allowed breathing room to the current account balance – currently hovering at a deficit of $14 billion. Curiously, excluding oil and petroleum imports, the Current Account recorded a surplus for the second consecutive month in April. Hence, the rapid depletion of the forex reserves held by the central bank – standing near $10 billion – is predominantly due to the oil payments made to the international market. Given the unfortunate context currently hosting inflation, how can a rate hike ease the price pressure? How can we expect to dilute inflation without even addressing a resolution to energy-import-driven inflation? And why is the focus on demand-side policies and not supply-side variables?

Demand-side policies are casting a contrarian effect on the economic stability of Pakistan. Unlike the United States, Pakistan is a developing economy that thrives on growing consumption, investment, and industrialization. While many analysts believe that a nearly 6% growth rate is unsustainable in the presence of macroeconomic imbalances, demand-curbing policies without supporting guidance are detrimental to export growth. The policy rate, for instance, is already abnormally high compared to the regional economies of India and Bangladesh. A persistent (and unnecessary reliance) on monetary policy has made credit costs unaffordable for the business community of Pakistan. Competing for international orders in markets – such as apparel or leather – now adds an artificial burden on domestic exporters. Naturally, prohibitive credit costs would put Pakistani exporters at a competitive disadvantage against regional rivals – especially in the markets with homogenous products. Ultimately, Pakistan risks losing international standing in growing markets or compromising on quality to maintain a competitive price-cost parity – both could plunge the export revenue of Pakistan. Moreover, as over 90% of Pakistan’s imports are essential goods, they been historically price inelastic. Thus, a high policy rate threatens to plummet export proceeds instead – further widening the trade deficit.

Additionally, the high policy rate continues denting the government budget due to heavy domestic borrowing. Almost 75% of commercial deposits have been lent to the government of Pakistan via recurrent auctions of T-bills and Pakistan Investment Bonds (PIBs). The SBP has been restricted from directly funding budgetary support to the government under the State Bank of Pakistan (SBP) Amendment Act 2021. Yet, the central bank has continued to provide trillions of rupees in liquidity to commercial banks through longer-tenure Open Market Operations (OMOs) – indirectly financing the cash-strapped regime. During his 45-month stint in office, former Prime Minister Imran Khan accumulated record borrowings worth Rs 21 trillion. With the IMF program on hold and multilateral lenders eyeing prospects of resumption on the sidelines, the government is again turning to commercial banks. However, the yields (traditionally settling at a 1% to 2% spread from the benchmark rate) are exorbitant. According to the Pakistan Bureau of Statistics (PBS), the yield on three-month T-bills stands at 14.3% in the secondary market, while six-month and twelve-month T-bills yield 14.5% and 14.6%, respectively. Hence, high policy rates and excessive OMOs are inadvertently ballooning the budget deficit – already hovering at Rs 5.6 trillion – via excessive interest payments.

Fortunately, the political chaos is settling after months of uncertainty, and fuel prices are inching towards reality. However, the Rupee is still trading near record-low in the interbank market – sustaining high import costs. Meanwhile, completely eliminating petroleum subsidies could likely push inflation to 18% by the end of this fiscal year. Banning about three dozen luxury imports is the latest step towards progress. However, it is merely a populist move as luxury goods accounted for only 1% of the total import bill of Pakistan. Thus, more stringent measures are needed to stabilize the economy. Pakistan’s Eurobonds have lost almost one-third of their value in the secondary market. And according to Dr. Khaqan Hasan Najeeb, the finance ministry’s former adviser, Pakistan’s default risk – measured by the Credit Default Swap (CDS) – has spiked to over 1,549 on the global index. Pakistan is scheduled to make repayments worth $4.5 billion on maturing global bonds in June. Unless the IMF resumes the $6 billion loan program, international borrowing is beyond approach for Pakistan. Commercial borrowing is also edging its limit as Pakistan cannot afford to borrow at existing yields. Thus, approaching multilateral and bilateral lenders is the only available option in the short run.

In the long run, supply-side reforms are the need of the hour. Currency swaps with China could hedge Pakistan’s sensitivity to sharp movements in the US dollar. National oil refineries should be upgraded to enhance their throughput and reduce the burden on the import bill. Meanwhile, the policy rate should get lowered to allow the export-oriented industries to grow and mitigate the trade imbalance. Ultimately – sensible, independent, and complimenting monetary and fiscal policies are pivitol to channel Pakistan through the choppy waters of uncertainty currently upending the global economy.

The author is a political and economic analyst. He focuses on geopolitical policymaking and international affairs. Syed has written extensively on fintech economy, foreign policy, and economic decision making of the Indo-Pacific and Asian region.

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Towards Re-Globalization: Defining a New Social Contract for the Global Economy

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“As the tides of re-globalization reshape our world, a new social contract emerges, illuminating the path towards a reimagined global economy. Through the embrace of collective cooperation and equitable practices, we can forge a future that transcends borders, empowering individuals and fostering a harmonious global community.”

Underlying every economic system is a social contract, which establishes the norms, values, and beliefs of the people involved. This contract dictates how individuals should behave within the economy, defines their reciprocal obligations, and shapes the way the economy operates. In numerous market economies worldwide, including both advanced and emerging nations, there is a prevailing materialistic social contract that is increasingly failing to address the basic needs of its citizens. Globalization, in its essence, is not inherently positive or negative. It possesses the potential to bring about immense benefits. However, to ensure that the globalization process remains balanced and prevents excessive control of financial institutions over the global economy, we need a world governing body that is accountable to the people of all nations.

To those who support globalization, often linked to the embracing of capitalism in an American fashion, it is seen as a path to progress. They argue that developing countries must embrace globalization in order to experience growth and effectively combat poverty. However, many individuals in the developing world have not witnessed the economic benefits that were promised with globalization. In Africa, the lofty hopes that emerged after gaining independence from colonial rule have, for the most part, gone unrealized. Instead, the continent finds itself descending further into distress, with declining incomes and deteriorating living conditions. Even the hard-fought advancements made in life expectancy over the past few decades have started to erode.

The critics of globalization claim that Western countries are guilty of hypocrisy, and their argument has merit. These countries have pressured impoverished nations to dismantle trade barriers, while simultaneously upholding their own barriers. Consequently, developing countries are unable to export their agricultural goods, leading to a detrimental loss of vital export income. The Western countries, even when not engaging in hypocrisy, have played a significant role in driving the globalization agenda. As a result, they have obtained a disproportionate share of the benefits, often at the expense of developing nations. This was not solely due to the refusal of more advanced industrial countries to open their markets to goods from developing countries, while insisting on open markets for their own goods. These advanced countries also persisted in subsidizing agriculture, creating obstacles for developing nations to compete, while simultaneously demanding that these nations eliminate subsidies on industrial goods.

When it comes to economic globalization, one controversial and almost draconian policy of the international financial system led by the International Monetary Fund  (IMF) is the requirement for developing economies to open up their markets to foreign competition, sometimes prematurely. These countries often feel compelled to comply with IMF demands because the provision of IMF funds is contingent upon swift trade and capital market liberalization. In contrast, developed societies, such as the United States, have historically protected industries considered unable to compete with foreign markets, until those industries became strong enough to thrive in a free market economy.

Perhaps most striking is the perceived hypocrisy of Western countries, who advocate for trade liberalization in the products they export, while simultaneously safeguarding sectors where competition from developing countries could potentially threaten their own economies.

For many years, the voices of the impoverished in Africa and other developing nations have often gone unnoticed in the Western world. Those who toiled in these countries were aware that something was amiss as financial crises became more frequent and the numbers of poor individuals grew. However, they had limited means to alter the rules or exert influence over the international financial institutions that dictated them. Those who held democracy in high regard observed how “conditionality,” the conditions imposed by international lenders in exchange for their aid, eroded national sovereignty.

The issue of governance lies at the core of the problems associated with the IMF and other international economic institutions. The decision-making power is primarily held by the wealthiest industrial countries, as well as by commercial and financial interests within these countries. As a result, the policies of these institutions tend to align with these dominant influences. It is often remarked that these institutions lack representation from the nations they serve, and the management positions are typically selected by major developed nations that are mostly driven by their own specific interests. Traditionally, the head of the IMF has always been a European, while the head of the World Bank is always an American. The selection process for these positions occurs behind closed doors, without any requirement for the head to have any prior experience in the developing world.

Economic theory does not guarantee that every individual will benefit from globalization, but rather suggests that there will be overall positive gains, allowing winners to potentially compensate the losers and still come out ahead. However, conservatives have argued that in order to maintain competitiveness in a globalized world, tax reductions and reductions in welfare state provisions are necessary. In the United States, for example, taxes have become less progressive, with tax cuts mainly benefiting those who benefit from globalization and technological advancements. This has resulted in a situation where countries like the US, and others following their lead, have become wealthy nations but with poor people.

The appeal of capitalist economies is often based on the principle of a material social contract, where people support this economic system because it promises higher living standards and greater economic freedom compared to alternative systems. The underlying assumption is that material prosperity can fulfill human needs. However, in many countries, this economic model has resulted in increasing inequality across various dimensions such as income, wealth, education, health, skills, and social esteem. It has also led to reduced social mobility, growing social divisions, and a widespread sense of disempowerment in response to the uncertainties associated with globalization.

In advanced economies, disparities have increased among different generations, with younger individuals falling behind their older counterparts, as well as between metropolitan and rural areas. These inequalities have eroded social cohesion, leading to reduced trust in government, lower civic engagement, decreased political participation, and a rise in support for populist ideologies. Policies such as corporate tax reductions and decreased welfare provisions have benefited a small portion of the population, who have then utilized their newfound economic power to shape the political process and media discourse to their advantage.

The interactions between successful business leaders, politicians, and journalists have contributed to a cycle of inequality, deregulation, and the gradual dismantling of social safety nets. This has been perpetuated through notions of “trickle-down prosperity” and the perception that there is a trade-off between equity and efficiency, suggesting that greater material prosperity can only be achieved at the cost of less material equality. As a result, an increasing portion of GDP growth has been channeled towards the top 1% of the income distribution.

The issue at hand is that economic globalization has progressed at a faster rate than the globalization of politics and mindsets. While our interdependence has grown, necessitating collective action, we lack the proper institutional frameworks to address these challenges in an efficient and democratic manner.

The main obstacle to successful globalization reforms lies not only within the institutional structures but also in the mindsets of key decision-makers. It is crucial to prioritize concerns such as environmental sustainability, ensuring the participation of marginalized communities in decision-making processes, and promoting democratic principles and fair trade. However, the challenge arises from the fact that these institutions often reflect the priorities and mindsets of those in positions of power. Typically, central bank governors are more focused on inflation statistics rather than poverty statistics, while trade ministers prioritize export numbers over pollution indices. This misalignment of priorities hinders efforts to fully realize the potential benefits of globalization.

Establishing a new social contract that is grounded in sustainable principles can help reconnect economic activity with the fulfillment of essential human needs. This redefined contract requires a fresh understanding of the responsibilities of businesses, households, and governments. It is evident that globalization can undergo change, but the crucial question is whether this change will be driven by a crisis or the result of deliberate, democratic deliberations. If change is crisis-driven, there is a risk of generating a negative backlash against globalization or haphazardly reshaping it, which could lead to potential problems in the future. On the other hand, taking control of the process offers a potential avenue to reshape globalization, enabling it to truly live up to its potential and promise of improving living standards for all individuals in the world.

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Why BRICS matters for Pakistan



BRICS represents Brazil, Russia, India, China and South Africa, encompassing 41% of the global population and 24% of the global GDP. The 15th BRICS Summit being held from August 22 to 24 in Johannesburg, South Africa. About 40 countries participated in this year’s BRICS summit where some key decisions were made adding six new members namely Argentina, Egypt, Ethiopia, Iran, Saudi Arabia and the UAE. The new membership will be effective from January 1, 2024.

In a historic first, Pakistan’s participation in the BRICS’s seminar, ahead of the summit, was encouraged by Beijing, which wants to integrate Pakistan into the alliance. However, Pakistan surprised the international community for not being the part of BRICS’s summit in Johannesburg. By joining BRICS, Pakistan could potentially benefit in multiple ways.

First, BRICS is the emerging power Centre of the world. Joining BRICS could open up economic opportunities for Pakistan. The country could engage in trade with other member states, benefiting from their growing economies. Pakistan’s exports could find new markets within the framework of BRICS. Muhammad Karim Ahmed analysed, “These BRICS countries are emerging economies and they have improved their country, their economic conditions, manufacturing, and found markets for themselves through joining the bloc”. Certainly, the economic prosperity will minimize unemployment, poverty and illiteracy in Pakistan.

Moreover, developing nations are dissatisfied with the stringent conditions imposed by western-dominated financial institutions like International Monetary Fund (IMF). BRICS has also created two new financial institutions, the New Development Bank (NDB), also known as the BRICS Bank and the Contingent Reserve Arrangement (CRA). CRA, which has a capital of more than USD 100 billion, can help member states withstand any short-term balance of payment crises. Pakistan if allowed in BRICS, can easily access the USD 100 billion CRA as well as the comparatively lenient loan conditions of NDB, without improving the functioning of the Pakistani state.

Second, BRICS membership could boost Pakistan’s geopolitical leverage by providing a platform to collaborate with other emerging powers on global issues. Pakistan has always been blackmailed by its traditional allies. Becoming a BRICS member could offer Pakistan an opportunity to diversify its diplomatic relationships. As a BRICS member, Pakistan could potentially demand for reforms in global governance structure. This could lead to a more equitable international order.

Third, some political analysts suspected that Pakistan’s inclusion in BRICS may generate disturbances with India, leading to a defunct group. However, it appears that India’s opposition to Pakistan joining the bloc is dying down. Recently, Indian Prime Minister Modi has supported BRICS expansion. South African president also welcomed Modi’s remarks, who remarked, “delighted to hear India supporting expansion of the BRICS”. Senator Mushahid Hussain Syed told Arab News that “First of all, Pakistan should apply for membership in BRICS, where the lead role is with China and where India is the weakest link due to its proclivity to be part of the West’s new Cold War against Beijing.” So, BRICS membership will certainly increase Pakistan’s diplomatic leverage with regard to India in the region.

Fourth, BRICS membership could also alleviate Pakistan stature in other regions of the world. For example, in East Asia there’s Regional Comprehensive Economic Partnership (RCEP), again China is in the lead there, but Pakistan isn’t ‘Looking East’! Why? Somewhat inexplicable, not seizing opportunities when these arise.

Fifth, BRICS membership will also introduce correctness in Pakistan’s foreign policy objectives. International community brands Pakistan as a terror sponsor state. Through joining BRICS, Pakistan could divert its security-oriented approach in foreign policy in line with BRICS manifesto. Even India used BRICS forum in Xiamen to condemn Pakistan-based militant groups like Lashkari Tayyaba. So, Pakistan could also use BRICS forum to project its soft image in the world.  

In the past, Pakistan has suffered immensely by aligning itself with one group against other.  There appear clear indications that Russia and China have shown clear intent to use BRICS to counter G-7, the grouping of powerful wealthy western nations. By orienting its foreign policy away from block politics, Pakistan could potentially get more economic benefits.

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The Concept of Sustainability for the World’s Cotton Industry Amidst Geopolitical Challenges

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The textile industry is one of the industries that contributes to the largest air pollution in the world. Responsible for 10% of global carbon emissions and 20% of global water waste, the fast-fashion phenomenon also contributes to this problem. If this is allowed to continue, the effects of global warming will get worse. The concept of sustainability itself can also be a polemic for the textile industry because they are experiencing global fluctuations caused by high inflation, weakening demands, and large inventory amounts.However, high global warming will also backfire on them and weaken this industry. Cotton, which is the raw material for making textile fabrics, deeply requires water and fertile soil. With the upcoming heatwaves that will occur, many dry lands will cause difficulties in world cotton production. The United States, as one of the largest cotton producers in the world, is starting to worry about this issue. Moreover, the energy crisis adds further complexity to this problem.

The textile industry itself is trying to revive itself due to many geopolitical problems such as the trade war between China and the United States, the post-Covid-19 situation, and the war between Russia and Ukraine. Even though the Government has been aggressive in advancing green transformation, many customers’ behavior places their spending on assets, automotive, housing, and so on. The problem of inventory buildup is due to textile production continuing to run and increasing but customer enthusiasm is always decreasing, coupled with the thrifting phenomenon which is currently rising.

To focus on green sustainability is a long homework for the textile industry. Although the textile business remains slightly positive in general in the first half of 2023, there are still fears of a global recession as the Federal Bank continues to raise interest rates. However, concerns about the issue of inventory buildup have begun to be resolved. In Cotton Day 2023 held by the United States non-profit organization Cotton Council International in Jakarta, Indonesia, one of the speakers, namely Bruce Atherley (Executive Director of CCI), stated that textile business actors have begun to be careful and control the turnover of textile commodity inventories, and this has resulted in decline in world cotton demand. However, he also stated that this effort could be a good thing and there is optimism about the stability of the textile industry ecosystem. With inventory being depleted across the supply chain, it can be expected that the cotton and textile industry will return to normal and positive demand.

Referring to sustainability and green transformation programs, many textile industry business players have made a commitment to only use sustainably grown cotton by 2025. They have also made a commitment to carbon reduction. This is contained in the regulations of the European Union and the United States, Investment Groups, as well as Focus Media and Non-Governmental Organizations. CCI also stated that the trust protocol will drive continuous improvement in key sustainability metrics by leveraging quantifiable data and variable data while delivering unparalleled visibility into supply chains for brands and retail members.

The concept of circularity must also be considered in green transformation efforts in the world textile industry. Circularity is the concept of minimizing waste and reusing resources. The circular model aims to create production and consumption that can be recycled (closed loop). Circularity is the solution for sustainability. Circular strategies include eco-friendly recycling, easy-to-reset designs, products as a service (PaaS), and increased producer responsibility. The benefits we will get from this concept are reducing the amount of waste, maximizing resource conversion, increasing investment, reducing carbon emissions, increasing economic opportunities, and improving brand reputation. However, this concept can also give rise to challenges such as technological limitations in developing recycling technology, supply chain complexity in traceability and transparency, complicated regulatory framework which includes supporting policies and regulations, and unpredictable consumer behavior. Hopefully more textile and cotton commodity industry players will pay more attention to the importance of the concept of sustainability in their production processes so that carbon emissions and pollution can be reduced which then prevent the worsening condition of global warming.

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