AS the noise and fury builds up in the run-up to the election, it is perhaps worthwhile to briefly disengage from the intensity of the moment and cast a glance at what sort of challenges lie in wait for the next government, whoever it might be formed by. What follows are some reflections on the critical economic challenges in my view. I’m leaving out the geopolitical, foreign policy or the political challenges that might arise from the nature of the parliamentary arithmetic, coalition formation or any other such matter.
The most immediate challenge will be stabilisation of the external sector which has fallen from a peak of five months’ import cover to nearly two months now. Foreign exchange reserves have fallen from the peak they hit in October 2016 and the downward slide continues unabated, despite numerous administrative efforts to arrest the growth of imports, and more recent attempts to realign the exchange rate with market-based realities. Exports have rebounded in recent months, but the trade deficit continues to grow.
From the looks of it the next government will, in all likelihood, begin its term the same way all preceding governments began theirs: by going to the IMF for a bailout loan. This time, however, there is a slight complication. Relations with America are crucial in how this works out. The Musharraf regime had a very difficult relationship with the superpower in 1999 when the coup happened and they first approached the IMF. The answer they got was a string of very tough “prior actions” to commit to, including first rescheduling the Eurobonds that were coming due. The Fund did not want its money to be used for paying private investors in those bonds, especially since there was strong reason to believe that a large number of those bonds were held by Pakistani investors.
The next government has no choice but to bring new lemons into the picture, something that successive rulers have failed to do for a quarter-century now.
The Musharraf government only got a six months’ standby facility, with extremely strict fiscal and monetary targets to meet, which they managed to do, but after that struggled again to arrange foreign exchange for the country until 9/11 came along and changed all equations. From that time on, manna from heaven dropped generously, and external sector vulnerabilities were comfortably forgotten till 2008. In both the approaches of 2008 and 2013, relations with the US were also decisive. The 2008 standby facility fell apart by 2011 precisely when relations with America were already on a downtick, and set to hit rock bottom with the Abbottabad raid a month later, followed by the Salala incident in November of that same year.
By 2013, fences had been mended again, and Pakistan received lenient treatment at the hands of the Fund. But now the story is different. The year opened with hostile rhetoric coming from the top levels of the US government and the pincer of FATF tightening around the country. The recent announcement of a breakthrough in talks with the Afghan Taliban could prove to be the pivot in this downward trajectory once again. The next government’s experience with the IMF could hinge on how well those talks work out. If they go well, the opening terms of the package could be soft. If not, the Fund could insist on greater disclosure of CPEC finances, especially the debt service commitments made to the Chinese (thus far the Fund has struggled to acquire that data from the government).
The next big challenge will be fiscal. Two things will dominate. The last budget presented by the outgoing government has highly unrealistic fiscal targets that will need to be reprogrammed, and perhaps some of the tax breaks will need to be rolled back. So a mini budget will be necessary, probably an exercise that will be rolled in with the drafting of the letter of intent for the IMF programme.
That will be the immediate part. The next big step will be finding out what to do about the NFC award. It will have been a decade since we saw such large-scale transfer of resources and responsibilities to the provinces, and both governments since then struggled to remain within the severely restricted resource envelope left behind after all the NFC transfers. The last budget, for example, transferred almost 45 per cent of gross revenue receipts of the federal government to the provinces. For the first time since Independence, the amount of resources being transferred to the provinces is only slightly less than the net federal receipts left for the federal government.
The rumblings of discontentment with the NFC award that we heard from the IMF last year, followed ominously by those from the army, will not go away. So in order to deal with this, the next government will have to consider ways to roll back these transfers as well as find new avenues to broaden the base of taxation. For 10 years the government has kicked that can down the road, especially since most of the large and dormant revenue lines now lie with the provinces.
To top it off, the PML-N government squeezed as much revenue as it could out of the existing tax base, using withholding taxes to the hilt. This lemon has been squeezed practically dry. The next government has no choice but to bring new lemons into the picture, something that successive governments have failed to do for a quarter-century now. Pretty hefty challenge I’d say.
Last, but certainly not least, will be challenges arising from CPEC and its growing management, as well as resource, requirements. These will be inflexible and toying around with them, the way past government have toyed with donor agencies, will not be an option. Next up, the challenge of growing gas shortages, and the increasing reliance of our industry on imported LNG, which can cost up to three times (and far more in other cases) domestic gas. The plate is heavy, let’s hope the mandate and the will to execute will be heavier still.
The writer is a member of staff.
Published in Dawn, June 21st, 2018