The caretaker government is currently focused on addressing economic concerns, including the proposed revival of the Karachi to Peshawar railway line (ML-1), financed by China for $6.7 billion, with the aim of reducing travel time between the two cities to 18 hours.
Considering financial aspects such as a 3% interest rate, a 2% insurance cost, and a 20-year payback period, the government is deliberating whether such foreign currency expenditures are feasible at the moment or if an alternative solution, like investing $150 million in a new signaling system to enhance train speed and track capacity by 20%, should be considered.
Today, the government faces significant domestic and external debts, and borrowing dollars to service foreign debt and creating new money contribute to inflation and devaluation. Moreover, the economy is grappling with minimal growth while absorbing more than 2.5 million new entrants into the labor force annually.
The caretaker government acknowledges these challenges but is inclined to stimulate growth as a potential solution. However, the author argues that the priority should be reducing inflation. Increasing the State Bank’s policy rate, the rate at which it lends money to banks, is an effective tool to curb inflation by lowering demand for goods and services.
The predicament lies in the fact that new credit primarily goes to the federal government, while private sector credit diminishes. When the State Bank raises interest rates, it raises the federal government’s debt servicing costs. In response, the government borrows more, leading to increased money supply and inflation.
Historically, governments have often neglected to evaluate the foreign currency viability of policies and projects. This oversight has led to a cumulative external debt and liabilities of $125 billion, with limited gains in terms of foreign earnings. For instance, the real estate sector amnesty in 2020 led to increased imports and a negative impact on exports, resulting in unsustainable import levels by 2021.
Similarly, electricity production capacity was doubled between 2013 and 2018 without proper consideration of its external viability, contributing to a fixed exchange rate policy that reduced exports and strained the economy. These policy decisions from the past continue to affect the country’s fiscal situation.
The economy finds itself in a Catch-22 scenario where the State Bank’s monetary policy is overshadowed by the federal government’s expansionary fiscal policy due to its substantial budget deficit.
As a recommended solution, the author suggests reducing Public Sector Development Programme and provincial Annual Development Programme spending to curtail federal and provincial deficits, making monetary policy more effective and controlling inflation. Until the fiscal situation stabilizes, growth should be pursued through investments focused on exports rather than domestic consumption.
Consequently, the author advises postponing the ML-1 project, as the current economic circumstances do not permit such an expense, likening it to buying a corporate jet for a financially troubled company’s CEO—a luxury the nation cannot presently afford. Similarly, the new railway line is deemed unaffordable at this time.