The economic challenges the post-election regime will face are massive, but no politician talks about how his/her party will address them. All they do is to label those who ask this question as “anti-democratic, pro-establishment, or foreign agents” – a setting that frustrates every Pakistani.
Politicians claim supremacy as “people’s elected representatives”; what they are obliged to deliver to the people isn’t their concern. They don’t heed even the forecasts of institutions like the IMF, which warns of a highly insecure economic future (and the consequent social turbulence).
Pakistan’s government spent too much time on its grossly party-centred efforts to ‘strengthen’ democracy; it paid virtually no attention to the economic slide that went on although it took control of Pakistan at the peak of the current global economic recession. So much for its economic vision!
An example thereof is the 58 percent slide in the rupee’s value over its January 2008 level. The regime tried to plug the energy gap by corrupt arrangements and worsened governance in the state-owned enterprises (SOEs) by appointing its cronies at the top and by overloading the SOEs with thousands of workers. On January 18, Jeffery R. Franks, IMF’s Regional Advisor spoke to the press on conclusion of IMF’s meeting with Pakistani officials that discussed the conclusions IMF reached via its Post-Programme Monitoring (PPM) of its 2008 Stand-By Arrangement (SBA) with Pakistan.
As expected, IMF expressed its concerns over Pakistan’s declining exchange reserves, rising fiscal deficit and public debt, falling real investment and GDP growth, consequent higher unemployment, and likely worsening of the social chaos as inflation again goes into double digits by June 2013.
The major concern Franks expressed (not reported accurately) was over Pakistan’s sustained failure to plug the energy and power gaps. He said “it is not just the lack of energy, it is the unreliability and unpredictability” while referring to the pitiful state of the administration of these two sectors.
According to Franks, “why should banks lend to companies to build new capacity when there is no electricity?” Doing so, he explained the reason why real investment was going down, and flight of capital was gaining momentum, which consistently weakened the rupee. His view that State Bank of Pakistan’s (SBP) monetary policy stance should be forward looking, not backward looking, too was justified because continued lowering of the SBP discount rate was essentially lowering the public debt servicing cost despite visible prospects of higher inflation.
Franks did not “stop short of endorsing analysts’ warnings that Pakistan could face a new balance of payments crisis within months without a new loan package”, as reported by the Pakistani press. In fact, he went to an extent that, although realistic, was inadvisable.
For instance, the statement that the rupee was overvalued by 5 percent to 10 percent is a view that could trigger a faster slide of the rupee. Also, that IMF desires taking on board ‘all political parties’ and the provinces for a new programme, if requested by Pakistan.
This indirectly refers to the rumour that IMF had informed Pakistan that any future SBA would have to be signed by the President of Pakistan, not its Finance Minister. Jeffery Frank’s response betrays IMF’s lack of faith in the government’s writ after recent fiscal decentralisation.
But he was right in saying that “there is still a balance of payments concern… exchange reserves in central bank have declined…. foreign direct investment has fallen sharply and other capital inflows [too] are also very weak.” Also, that official reserves at less than $9bn (covering about two months’ imports), are inadequate.
Reserves equal to at least three month’s import bill is what foreign banks insist on while taking minimum transaction risk on a country. Franks confirmed this when he said that, as per IMF estimates, the minimum desirable level of exchange reserves was $15 billion.
His view that exchange reserves are “not yet at a critical level but it’s important to address the policy…. well before you get to the point where they become critical” was dictated more by the needs of diplomacy than those dictated by pure, unbiased prudence of a banker.
The current scenario, wherein foreign inflows (except for remittances by Pakistanis abroad) have practically dried up, implies that the present government has failed to enact the basic reforms (transparent administration and credible security) needed to boost foreign inflows.
Franks warned that Pakistan would face huge financing needs in the coming months given the rapid depletion of its exchange reserves. But the worry is that given its policy failures, Pakistan no longer qualifies for a new IMF facility (now the sole source) to rebuild its exchange reserves.
The IMF repeatedly pointed to the energy shortfalls and bad governance in the SOEs as major hurdles in economic growth because the financial burden of these flaws was squeezing availability of credit to the private sector that alone could perk-up the sliding GDP growth.
But nothing was done in the power sector ie recovery of bills from state offices, lowering its production cost, and improving the discos’ efficiency by minimising line losses (all building the ‘circular debt’), while SOEs continue to be used to enrich the coalition members’ cronies.
Instead of addressing these serious flaws, the focus is on the ‘tax amnesty scheme’ which, according to Franks, the IMF doesn’t support, except for measures therein providing for making the enforcement tools more effective to identify and punish tax evaders and unregistered individuals.
Pointing for the umpteenth time to the grossly flawed tax collection system due to which nearly half the economy remains undocumented and doesn’t pay taxes, he advised against short-tem rescue measures like amnesty schemes, and emphasised focusing on improving the tax machinery.
Earlier, during the PPM meeting with Pakistan’s Finance Ministry, IMF had warned that, in FY13, Pakistan’s fiscal deficit would touch 7.5 percent of its GDP (Rs 1.6244 trillion in absolute terms). It is worth remembering that, in FY12, fiscal deficit had touched 8.5 percent of the GDP.
Also, that Pakistan’s GDP growth could, at best, touch 3.5 percent of its GDP, while inflation could again rise in the third quarter of the current fiscal year. Finally, while the current account deficit may stay at 0.7 percent of the GDP, it would pose a huge challenge because foreign inflows are drying up.
According to the IMF, economic policies need revamping so that fiscal deficit is cut to 3.5 percent of GDP in next three years and inflation contained within 5 to 7 percent range. Also, total public debt (at present slightly over 60 percent of the GDP) too must come down to match the country’s repayment capacity.
A. B. Shahid, "Supremacy versus obligations," Business recorder. 2013-01-22.
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