If everything goes well, Pakistan should see a new post-election government taking charge of the state soon. The new government will inherit numerous economic and social problems – the redressal of which will certainly be challenging.
Five years of economic mismanagement and poor governance by the previous regime have not only damaged the economy but also severely weakened the key institutions of the country like the State Bank of Pakistan (SBP), the Ministry of Finance, the Planning Commission, etc. The new government will inherit an economy which has been growing at an average rate of 3.0 percent per annum over the last five years, failing to create enough jobs for new entrants each year and thereby increasing the size of the unemployed pool. Investment rate, at 12.5 percent of GDP, has been the lowest in the last fifty years and foreign investment has shrunk to one-tenth of what it used to be in 2007/2008.
Fiscal indiscipline was the norm rather than the exception during the last five years. Budget deficit averaged at 7.0 percent of GDP, reaching 8.5 percent of GDP last year and likely to surpass that figure this year. Persistence of large fiscal deficit along with sharp depreciation of the exchange rate caused public debt to rise at an unprecedented pace. Consequently, interest payment emerged as the single largest expenditure item of the budget, consuming over 50 percent of the tax revenue collected by the FBR, thus leaving very little money to be spent on people and infrastructure.
The energy crisis, as a result of the mismanagement of the power sector, has severely damaged Pakistan’s industries and commercial activities in addition to inflicting misery upon the people of Pakistan, particularly during the summer. As a result of the energy crisis, Pakistan is losing 2.5-3.0 percentage points in economic growth each year. Without addressing the energy issue, economic revival will be a distant dream for the new government.
Bleeding PSEs is another economic challenge that the new government will be inheriting. These PSEs are consuming over Rs300 billion per annum of taxpayers’ money. The previous regime has treated them as an employment bureau. Giving jobs to people is not the job of the government. Its job is to create conducive environment through policy initiatives where the private sector can come forward, expand its businesses and create jobs.
Most importantly, the new government will face the immediate challenge of insolvency. Pakistan’s foreign exchange reserves have depleted at a dangerous pace. The SBP has only $6.6 billion in its reserves, and if we exclude the forward buying of the SBP to prop up the rupee, the foreign exchange reserves, as of today, stands at around $4.3 billion. Over $800 million payment to the IMF alone is due by end-June 2013. Thus, the new government will inherit around $3.5 billion reserves – sufficient to finance less than three weeks of imports and more than enough to trigger a crisis of confidence and flight of capital.
In sum, the new government will have to revive the economy, restore investors’ confidence, reduce budget deficit by mobilising more resources and rationalising and prioritising expenditure, address the issue of bleeding PSEs and energy, and save the country from external default.
How can these challenges be addressed? Whether we like it or not, Pakistan has no option but to seek IMF assistance to prevent default. No friendly countries will come forward to bail Pakistan out. The size of the IMF programme, the pace of adjustment and the conditionalities will have to be negotiated by a competent team.
The conventional macroeconomic policies advocated by the IMF since the 1980s have always emphasised stabilisation in the narrow sense of reducing the budget deficit, controlling debt and keeping inflation low. Many countries including Pakistan succeeded in stabilising their economies at the expense of economic growth and social development by cutting expenditure on education, health and even infrastructures.
While keeping inflation low and budget deficit and debt under control are important objectives of macroeconomic policies, disregarding important development objectives could be highly detrimental for the economy’s long-term prospects. In this perspective, world leaders at the Rio+20 Summit in Brazil last June, as well as G-20 leaders during the spring meeting of the IMF-World Bank this month in Washington DC called for reframing the development agenda, including rethinking the macroeconomic policy paradigm that focuses on stabilisation alone.
They have recognised the importance of growth, job creation, equality, social development and environment for which they have advocated the adoption of forward-looking macroeconomic policies that promote sustainable development leading to inclusive and equitable economic growth on the one hand and stabilisation on the other. The forward-looking macroeconomic policies, as documented in the ESCAP Survey 2013, advocate striking a balance between stabilisation and developmental roles of macroeconomic policies.
The economic team of the new government must keep in mind that macroeconomic policies should not focus narrowly on reducing budget deficit, debt stabilisation and curbing inflation, but should be supportive of growth and employment creation as well. Such macro policies do not in any way advocate lax fiscal policy or encourage fiscal irresponsibility. Rather, they place greater emphasis on the quality and composition of public expenditure on the one hand and domestic resource mobilisation on the other. In other words, it is a matter of degree as well as pace of fiscal adjustment with a view to minimising the cost of adjustment.
What the economic reform agenda of the new government should be, as enshrined in the forward-looking macroeconomic policies, will be the subject matter of my article next week.
The writer is principal and dean of NUST Business School, Islamabad.
Email: ahkhan@nbs.edu.pk
Dr. Ashfaque H Khan, "Economic reform agenda," The News. 2013-04-30.Keywords: Economic issues , National issues , Post elections , Public debt , Economy-Pakistan , Foreign investment , Financial crisis , Macroeconomic policy , World Bank , Economic planning , State Bank-Pakistan , Exchange rate , Fiscal policy , Unemployment , Pakistan , SBP , GDP , FBR , PSEs , IMF , ESCAP