Can the new Pakistani government prevent an economic meltdown?
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The recent assessment by the Asian Development Bank (ADB) on Pakistan's economy indicated a clear slow-down and double-digit inflation during the ongoing fiscal year. Rupee depreciation was also expected to contribute to an increase in the external debt burden. This economic assessment came a little prior to the political transition in Islamabad. The print and electronic media was full of comparisons with Sri Lanka’s recent economic experience where Colombo defaulted on its external debts. Many debated whether Pakistan’s economy would also meet the same fate.
While a relatively smooth transition of power has given confidence to financial markets, the pressure on foreign exchange reserves remains. Reserves held by the State Bank of Pakistan (SBP) fell to $11.3 billion by April 1, compared with $16.2 billion a month earlier. These reserves barely give a two-month cover to imports-- however even this could decline given upcoming external repayments. This implies that the Pakistani rupee will remain under pressure vis-à-vis greenback and other major currencies.
The incoming finance team has indicated an expected widening of the budget deficit well beyond what was envisaged by the outgoing government. This is largely expected as the government led by PML-N will need to dole out extensive amounts of public expenditures to satisfy and keep coalition partners in Sindh and Balochistan together. During a maiden visit to Karachi, the new Prime Minister already agreed to a large wish-list presented by the PPP and MQM leadership.
Like the initial days of PML-N and PTI in office, who faced a fast-depleting kitty, PM Sharif will need to get on a plane and reach out to Pakistan’s friends with two goals: get a rollover on upcoming payments and seek additional foreign currency denominated loans to cover for unavoidable repayments and upcoming import demands.
The other type of resource mobilization is required at a local level to support the widening of the budget deficit. The government’s domestic borrowing from commercial sources could increase to plug deficit – already at PKR 2 trillion during the first seven months of the ongoing fiscal year. The Prime Minister’s first speech to the National Assembly also informed about a raise in public sector salaries and pensions. With PPP in the coalition, it seems likely that expenditures towards the Benazir Income Support Program (BISP) will also increase.
Amid the above-mentioned economic milieu and uncertainties around the tenure of the new government and expected early elections, it will be difficult and could take time for the government and International Monetary Fund (IMF) to reach an agreement regarding restoration of the Extended Fund Facility – much desired by multilateral partners. The main difficulty for the PML-N led government will be to agree to hikes in prices of fuel, electricity and gas; rationalization of subsidies allowed under various heads; and denotification of amnesties, all politically unpopular moves.
What the PML-N government could do before the caretaker setup and the next general elections is to give a clear forward-looking roadmap for economic sustainability.
Dr. Vaqar Ahmed
The PTI government has left behind a yet to be implemented circular debt management plan. Incoming news reports suggest that the new government is bound to change the contours of this plan. The utility companies in both electricity and gas are under increasing financial stress and remain unable to clear past outstanding dues. Provisional data indicates around PKR 2.5 trillion circular debt in electricity and PKR 1.6 trillion in gas sectors. PTI government had frozen petroleum prices – a measure which the new Prime Minister will have to undo if an agreement with the IMF has to be reached though he has rejected doing so this far.
What the PML-N government could do before the caretaker setup and the next general elections is to give a clear forward-looking roadmap for economic sustainability. Rhetoric around the Charter of Economy and reaching a multi-partisan consensus have not had much success since the past decade. This is primarily because economic policy follows ideologies of political parties which are often poles apart. Second, in an environment of weak balance of payments, having a home-grown plan and implementing it in letter and spirit is often difficult as tight conditions from IMF and donors also need to be complied with.
What is more important is to focus on the increased vulnerabilities faced by the poorest of the poor. The gains in terms of early economic revival after the second wave of COVID-19 have been fast wiped out. A key lesson was that there never is room for complacency for an economy which is exposed to global price inflation. The global shortages of essential commodities could become acute depending upon the medium-term fall out of the Russia-Ukraine crisis. Amid these realities, finding and protecting fiscal space for social protection, health, education, and other contributors to Pakistan’s future human development remains important.
- Dr. Vaqar Ahmed is an economist and former civil servant. He tweets @vaqarahmed