When it comes to fixing the Pak economy the debate is always a confusing one. With so many different forces pulling in opposite directions, more often than not, the economic policy makers are at crossroads as to which route to follow. Should they be applying breaks on spending, attracting the savers, increasing interests rates to stabilize the Pak Rupee or instead be primarily focusing on growth by in fact going the opposite way in order to create employment and economic opportunities? Regrettably, there is not one single or a simple answer to this and perhaps the solution lies in following the middle course by doing a bit of both, albeit with different set of economic tools.

On a more conservative note and given that a slowdown may not be a phenomenon peculiar to Pakistan alone, the State Bank of Pakistan (SBP) should perhaps be pushing for an increase in the policy rates in order to signal that it is willing to risk prolonging what is already the lowest economic growth in years to quash persistent inflation. As Pakistan stumbles through its worst economic crisis since 1999, by taking this direction of upward revision of interest rates, the SBP will in effect be putting pressure on Islamabad to relieve supply-side bottlenecks in the economy, like poor infrastructure, corruption, excessive and unhealthy governmental oversight, energy, cartelization, hoarding, rent-seeking and a deteriorating law & order situation, that keep inflation high even when demand is soft. Also, there is a case to shift the SBP’s main inflation gauge to consumer prices from wholesale prices, putting Pakistan in line with most emerging economies. In addition, such a move will at the same time push up near-term rate expectations, which in itself should counter inflation. By most accounts, the consumer price inflation was well in excess of 10 percent for August 2013, meaning the cost of living is rising faster than interest rates. Lifting rates may compel Pakistani households and businesses to shift more of their savings towards banks and away from real estate, commodities like gold and silver, and from conversion into US dollars, addressing a trend that has pushed down deposit growth in recent times.

Whereas, the above direction cum policy measures by the SBP should bring down inflation expectations and help correct Pakistan’s macroeconomic imbalances, it would also mean severe ‘growth’ pains over the years. Further, one of the biggest drivers of inflation in Pakistan, the rising cost of food, is generally not sensitive to rates, meaning the net effect of central bank’s policy tightening may be on managing inflation expectations and not as much as on inflation itself. What this basically implies is that when raising interest rates, the SBP should not do so dramatically. A weak economy could provide cushion in terms of disinflation processes at work, but will also give an incentive to then perhaps look at putting greater emphasis on reviving the much needed growth in the economy. As we know the Pakistani businesses are quite worried that higher rates could prove damaging. Many companies are already struggling with a dried up credit due to being ‘crowded out’ by governmental borrowing and the concern is that policy rate hikes will have further adverse impact on the investment sentiment.

This is where the new government will need to play its part by displaying sound economic governance. The whole world these days is focused on bringing out respective economic reforms and Pakistan cannot be an exception. Whether in the struggling economies of the Euro-Zone or in the strongest emerging global economy of China, homegrown solutions, tailor-made policies to suit national requirements and environment are being evolved. For example, for the first time in more than 30 years we are witnessing a renewed drive in Europe that calls for liberalized labor reforms to allow employers enhanced flexibility in hiring and firing, longer working hours to reduce costs and increase operational productivity cum competitiveness, and softening of carbon emission benchmarks in order to help companies overcome high energy costs. China, on the other hand is also busy rediscovering itself and working out a new optimal solutions to economic governance amidst changed global circumstances. This renewed focus of the new Chinese leaders is set to be on: reforms, adjustment to the new - post 2008 financial crisis - global dynamics, and on innovation.

Regardless of where you look a momentum is building for reforms that would introduce market prices for oil, gas and other natural resources so that prices better reflect supply and demand, rather than official fiat. In China, their new economic managers sincerely believe that distorted pricing has been the main cause of China’s energy inefficiency and environmental degradation. However, just like these new steps toward liberalizing energy prices, Shanghai’s new free-trade zone is another positive indicator. Pakistan can also learn from this. However, since in our case the malaise is so deep, more will be needed in shape of: broader access to capital, greater investment options and protections from haphazard capital flows. Also, a new round of fiscal reforms should be introduced taking in account the devolved responsibilities through the 18th and 19th constitutional amendments. These reforms should ensure a more rational allocation of resources between the centre and the provincial governments and also address the rebuilding of weakened education and health care systems in provinces to manage in a sustainable way the fast happening intra-provincial urbanization and aligning the related job growth with the urbanization’s pace.

Finally, when it comes to Pakistan, sometimes the introduction of market pricing in utilities and services may not be as easy or as beneficial as it sounds. There are two inherent problems: First, is the rampant inequality amongst the general public that means that unless a vast number of people are directly supported by the government they will simply just slip out from the circle of ‘consumers’, thereby being pushed further down the poverty trap and the Second, has more to do with all the consumers in general, who argue that why should they be paying for government’s inefficiencies? And for the present PML -N government in Pakistan, a country notoriously rife with graft, bribery, nepotism and corruption, overcoming these elements presents an even bigger challenge!

 The writer is an entrepreneur and  economic analyst.