The complex economic landscape confronting Pakistan’s caretaker government
The new caretaker government in Pakistan will be grappling with a multitude of economic challenges. These encompass high and unpredictable inflation, a slump in economic activity that complicates revenue collection from various sources, a constrained budget that endangers ongoing government operations and development projects, managing escalating debt levels, the pressing need for increased imports to support domestic production and export sector, and the Pakistani rupee's vulnerability due to a slump in remittances and foreign exchange reserve levels that barely cover a couple of weeks' worth of imports. There are also some debts maturing later this year which will need to be honored.
Adding to the complexity, there's a pervasive sense of dwindling confidence in the economy. The political landscape remains uncertain, with questions lingering about upcoming elections, and the timeline for the new elected setup and parliament's long-term policy direction. These uncertainties have dissuaded potential long-term investors from committing capital over the past 18 months.
On top of these economic hurdles, the caretaker government must also navigate the challenge of overseeing the International Monetary Fund (IMF) standby arrangement. The IMF has extended support to Pakistan under certain conditions that necessitate specific economic actions by the state. Adhering to these conditions is vital to secure the loan. This compliance is so important that the outgoing government didn’t take the risk of leaving the task of jacking up electricity tariffs and fuel prices for the caretaker setup who will be facing the IMF review later this year.
From a legal standpoint, certain economic reforms may be beyond the scope of a caretaker setup without an elected parliament.
Dr. Vaqar Ahmed
Nevertheless, the IMF remains cautious, largely due to Pakistan's political instability. Discussions with IMF officials have hinted at the potential withholding of future financing if elections face delays, which could also disrupt investments from other bilateral and multilateral donors. This poses a significant challenge for the caretaker government, as the timing of elections remains uncertain, particularly since the outgoing Council of Common Interest has indicated that elections will align with new census results, a process that could span much of the spring and summer of 2024.
In the scenario of delayed elections, the caretaker administration must address five key expectations outlined by development partners, including the IMF. These expectations range from adhering to agreed-upon budget deficit limits, managing inflation to mitigate its impact on ordinary citizens, addressing vulnerabilities associated with future debt repayments, committing to energy sector reforms, and rationalizing support for inefficient state-owned enterprises that rely on bailouts.
The spectrum of stakeholders for caretakers extends beyond the IMF and bilateral funders. The Pakistani business community awaits clarity amid a challenging business environment. The decline in investment levels has led to temporary or permanent closures across various industries. Exporters and freelancers are safeguarding their funds in foreign bank accounts, fearing an inability to meet their financial obligations. Interest rates show no signs of decreasing in the near future. Given limited potential for substantial public investment, it is crucial to take steps that lower regulatory costs, thereby reducing the overall cost of doing business. As the next elected administration may have limited time to formulate the fiscal year 2024-25 budget, the caretaker setup must think through broad parameters, including a progressive tax and tariff code.
In the event of potential delays in the next IMF review, the caretaker administration may require the support of friendly countries. This could entail intensified diplomatic efforts, particularly with China, Saudi Arabia, and the United Arab Emirates.
From a legal standpoint, certain economic reforms may be beyond the scope of a caretaker setup without an elected parliament. If elections are delayed, the caretaker economic team might resort to presidential ordinances, a practice that is usually challenging to sustain as ordinances have a limited duration and vested interests can defer economic adjustments.
Moving forward, the caretaker setup has the opportunity to craft a robust economic plan not only for the next five years but also for the longer term. This vision aligns with the outgoing Prime Minister's concept of 'Misaq-e-Maeeshat', wherein not only the government and future coalitions but also opposition parties collaborate to restore confidence among local and foreign stakeholders and, more crucially, stabilize key macroeconomic indicators.
The caretaker economic team must pay heed to disenchanted investors. Both PTI and PML-N led coalitions pursued the Pakistan Regulatory Modernization Initiative (PRMI) with support from provincial governments – an effort that the caretaker setup should prioritize. This initiative is anticipated to significantly reduce bureaucratic hurdles, minimize human interactions with regulatory bodies, and alleviate the high regulatory costs borne by established and startup enterprises.
- Dr. Vaqar Ahmed is joint executive director at the Sustainable Development Policy Institute (SDPI). He has served as an adviser to the UN Development Programme (UNDP) and has undertaken assignments with the Asian Development Bank, the World Bank, and the Finance, Planning, and Commerce Ministries in Pakistan.