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Economic impasse is a ticking bomb waiting to go off

Nothing is going right in the country. The sovereign default is inevitable without an IMF (International Monetary Fund) deal which is being delayed at the behest of political leadership. Meanwhile, the court hearings, Zaman Park clashes, and street power demonstration by PTI (Pakistan Tehreek-e-Insaf) and the ruling machinery including establishment, PDM (Pakistan Democratic Movement) and caretaker Punjab government were the highlights of the last week. Yet another week went by once again. The slow poisoning has been placed on fast-dial.

It seems that those who are at the helm either do not have the capacity or willingness to comprehend the gravity of economic crisis or are purposefully diverting the news flow to political drama and mass clashes with law enforcing agencies. People need avenues to display their anguish against the record-setting inflation and growing unemployment. With or without Imran Khan, the unemployed and underemployed youth would keep demonstrating their resentment when they feel that those at the helm have different priorities than securing the future of young population.

The mistrust with the ruling party is growing. The PDM snatched power last year on the premise that the then PTI government was incompetent and a selected one, and claimed that PDM’s experienced team would steer the economy out of the crisis. The fact of the matter is that ever since the PDM came to power, the economic slide has only accelerated, and the misery of the masses has only deepened.

I wrote an article carried by this newspaper in September 2022 with the warning that the situation is likely to worsen given host of internal and external factors, killing the economy in the process. I argued that the country warranted political stability to salvage the economy and that this stability cannot be achieved without immediate elections.

However, zero progress has taken place towards these goals over the last six months. The same arguments hold merit even today. Economic recovery is still hinges upon political stability and that is not likely to be achieved without the announcement of date of elections. Yet, PML-N (Pakistan Muslim League-Nawaz) and the ‘powers that be’ appear to be zeroing in on a common enemy. Some say that they both want IK out of the equation, as he perhaps is a threat to their respective political constituencies and controls. And economic slide is a casualty in the process.

This misalignment of incentives is not helping the economy despite the government taking almost all the required fiscal, energy, monetary and exchange rate steps which in accordance with the IMF stipulations. Precious time has been wasted by the government (mainly PML-N leadership) in securing guarantees from (or giving guarantees to) ‘powers that be’ on how to make IK irrelevant. This is evident by taking tough steps without cohesion and planning. One example is dilly-dallying over the exchange rate. The authorities perhaps attempted to dodge key decision making and wasted crucial time. All this has only widened the trust gap between the finance ministry and the IMF.

Lately, taking supposedly tough economic action are coinciding with the efforts to arrest IK and the bullying of PTI supporters by law enforcing agencies. These economic measures are inching Pakistan towards the IMF deal while the politically charged up actions are making political stability elusive which is indirectly a condition of the IMF. This is not adding up.

IMF has two distinct sets of conditions at this point in time. One is macroeconomic steps which have largely been taken. And the other is financing from friendly countries and other partners to ensure external debt sustainability. There is no deal without either. And the political stability is inversely proportional to the severity of fight with the PTI.

Last week, news from the IMF suggested that Staff Level Agreement (SLA) was about to be achieved and only material detail left was verification of financial assurances from friendly countries. The financing gap agreed with the IMF is $6 billion, and within it the government is envisaging $2 billion deposits (or other form of loans) from Saudi Arabia and $1 billion from the UAE. The condition is that the money is required to be in SBP’s account before the IMF’s board meeting.

Last week, when the IMF asked the Saudi finance ministry about the firm commitments to shore up the forex reserves of Pakistan before the IMF deal, the answer was that there is no such commitment. However, authorities in Pakistan were saying that they had the assurances. Now someone is either lying or misinterpreting the agreement with the Saudis, or the flows hinge on prior conditions such as political stability.

Saudi authorities are openly saying that there is no easy money for countries such as Pakistan. Both the IMF and the Saudis are demanding economic reforms. And it is beyond meeting conditions review by review. The ownership and acceptance of reforms is perhaps missing. There is a recurring trend in the past eighteen months of complying with the IMF conditions of a particular review and later reneging on promises or reversing of the steps taken. This connects back to the political instability.

It is quite possible that the lenders have concluded that finance minister Ishaq Dar and PDM may reverse tough measures such as raising of energy prices and exchange rate depreciation, once flows from the IMF and others are in the kitty, to provide short-term relief before going towards elections. Given the high risk of this taking place, the Saudis and others are perhaps not helping. And in frustration (or to hide the failure), the attention was diverted to IK’s arrest and events related to this episode.

The bottom line is that neither IK has been arrested nor has the IMF deal happened. The government can only achieve one or the other. The correct choice should be the IMF program for the sake of 220 million Pakistanis. Nothing short of agreement on fresh elections with the PTI can work. And the time has almost run out.

Ali Khizar, "Economic impasse is a ticking bomb waiting to go off," Business recorder. 2023-03-20.
Keywords: Political science , Political leadership , Growing unemployment , Monetary fund , Zaman Park , Imran Khan , Ishaq Dar , Pakistan , IMF , PDM , PTI , PML-N

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