Two years of PTI rule: Are better times ahead?
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This month marks two years since the Pakistan Tehreek-e-Insaf (PTI) government was elected on the back of a transformative agenda that promised reforms to eliminate deeply entrenched structural inefficiencies in the economy. A wave of optimism ushered in the change with expectations that it would eliminate corruption in the public sector, boost private sector investments, and generate economic activity to provide employment for the burgeoning youth bulge in country.
However, the government inherited an expanding trade deficit and annual current account deficit in excess of $18 billion. Dwindling forex reserves and $9 billion of external debt repayments due in the first year spelled a balance of payments crisis. Hopes of reinvigorating the economy were greeted by the reality of a potential economic implosion. Stabilizing the economy had to be prioritized ahead of all other electoral promises.
This meant correcting the misaligned combination of loose monetary policy and support of an overvalued currency. The State Bank of Pakistan (SBP) adopted a market-determined exchange rate mechanism that resulted in the rupee depreciating by 30 percent, which in turn fueled inflation. This was exacerbated by gas and electricity tariff hikes to stem circular debt growth. The unavoidable tightening of monetary policy and fiscal austerity suppressed economic growth while rupee depreciation and tariff hikes drove inflation to peak at 14.6 percent.
Although politically unpopular, these measures yielded results as imports fell by 6.8 percent in fiscal year 2018-19 and a further 19 percent in 2019-20. This helped narrow the current account deficit and stabilize the rupee. Both inflation and interest rates were on a downward trajectory as of March this year. The economy showed signs of a turnaround as the government posted a primary surplus for the first nine months of 2019-20 after several years of deficits.
With improved growth prospects, foreign exchange reserves close to $20 billion, and consumer price index (CPI) August figures indicating that inflation is likely to average below 8 percent for the current fiscal year, the government can now focus on delivering on its agenda for policy and administrative reforms.
Javed Hassan
When COVID-19 broke out, it threatened to reverse incipient growth and the hard-won improvements on the fiscal and external account. The International Monetary Fund (IMF) and SBP predicted that Pakistan’s economy would contract by 1.5 percent, and the primary deficit rise to 2.7 percent of gross domestic product (GDP) in 2019-20. It is therefore encouraging for policy makers to see GDP in actuality shrink by only 0.4 percent and primary deficit at 1.8 percent.
This better-than-expected performance can be attributed to a decision to avoid a complete coronavirus lockdown and institute a policy of smart lockdowns that allowed large segments of the economy to continue functioning. Direct cash transfers of Rp160.4 billion to 13.1 million households through the Ehsaas Program helped prevent social unrest and maintain purchasing power.
While the pandemic continues, there are early signs of a V-shaped economic recovery. Petroleum product sales and electricity output are back to pre-coronavirus levels. The revival of the construction sector and export demand boosted cement sales in July by 37.8 percent year on year. Narrowing of trade deficit and robust inward remittances have helped turn around current account surplus of $424 million in July from a deficit of $100 million in June 2020. The improvements are also reflected in the Federal Bureau of Revenue (FBR) exceeding its tax collection target by 23 percent in the first month of the current fiscal year.
Renegotiation of power purchase agreements with independent power producers points toward comprehensive sector reforms and has helped mitigate the circular debt issue and will possibly provide relief to consumers in tariff reductions.
The government has also shown commitment in implementing the Financial Action Task Force’s (FATF) action plan for addressing deficiencies in policies and legislation to control money laundering and terror financing.
With improved growth prospects, foreign exchange reserves close to $20 billion, and consumer price index (CPI) August figures indicating that inflation is likely to average below 8 percent for the current fiscal year, the government can now focus on delivering on its agenda for policy and administrative reforms.
In order to improve the industrial sector’s competitiveness, the tariff structure needs rationalization and the state must extricate itself from loss-making state-owned enterprises. Going forward, the government must maintain fiscal prudence and avoid creating macroeconomic imbalances. Revenue collection will have to be enhanced by improving FBR functioning through modernization and digitalization.
Entrenching a business-friendly but competitive environment should help remove rent-seeking cartels and revitalize the economy. A progressive tax regime can help fund much-needed support to society’s most vulnerable members. If the government can bring about such a transformation, it will prove that the worst of times are behind, and better times lie ahead.
*Javed Hassan has worked in senior executive positions both in the profit and non-profit sector in Pakistan and internationally. He’s an investment banker by training.
Twitter: @javedhassan
