Pakistan faces an incipient financial crisis. The burgeoning current account deficit over the last two years in the external balance of payments has led to a serious haemorrhaging of the foreign exchange reserves. These reserves have fallen by $8.3 billion since June of 2016 and now stand at $9.8 billion. If ‘swap’ funds with the SBP are excluded then the actual level of reserves is only $3.4 billion, not even enough to finance one month’s imports.
Strong actions ought to have been taken in 2017-18 to prevent the imminent financial downturn. But this was the year prior to the elections and the incumbent government preferred to make only relatively mild moves. Some steps even aggravated the situation like the big income tax breaks in the Budget of 2018-19.
We now have passive economic governance. By the time the newly elected government comes in the economic conditions may have worsened even more.
The obvious option is for the new government to go back to the IMF. The fundamental problem is that in the election campaign no major political party has recognised fully the magnitude of the impending financial crisis, the usual offering of gifts to the people is at a peak, raising expectations at exactly the wrong time.
Therefore, there are two possible scenarios. First, going back to the IMF will mean acceptance of tough prior actions like probably a further steep devaluation, rise in tax rates and energy prices and so on. Given the vulnerable position that the country will be in, non-economic conditionalities may also be introduced bilaterally by the largest member of the IMF Executive Board. The alternative option of seeking support from friendly countries is unlikely to fill the huge external financing requirement of over $26 billion in 2018-19 in the ‘business as usual ‘scenario.
The second scenario is one in which the party in power hopefully rises to the occasion and calls for a political dialogue to arrive at a broad-based consensus on the difficult actions and deep structural reforms to be undertaken. The only party which has come close to highlighting the need for national consensus at this time, even to the extent of formation of a national coalition government is the PML-N. This should be recognised as a serious proposal in the face of the very difficult days that lie ahead for Pakistan on the economic front.
The immediate challenge for a new government is the macroeconomic situation as Pakistan’s balance of payment (BOP) situation continues to deteriorate. The flow of funds resulting from the tax amnesty and from an expected loan from China will, at best, give temporary relief. This is because the BOP situation is a manifestation on an underlying crisis of international competitiveness of our economy that the new government will need to address, which results in our ability to earn foreign exchange falling short of foreign exchange requirements as growth rates begin to rise. It also leads to low productivity and low social mobility.
The main difference between parties is in their underlying ethos. The PPP is raising issues of social policy, redistribution, women’s empowerment and the revival of agriculture. The Bhook Mitao programme (women-run subsidised food outlets at the level of union councils), benchmarking the minimum wage to a living wage, universalisation of the Employees’ Old-Age Benefits Institution (EOBI) pensions and the provision of agricultural subsidies directly to poor farmers through the Kisan Card are some of its promises.
The party claims that it has a credible track record in delivering social programmes and cites the Benazir Income Support and the Lady Health Workers programmes as examples. Its emphasis is thus very much in the realm of left-of-centre social democratic parties. Both the PML-N and the PTI are right-of-centre and neo-liberal in their orientation, although with important differences in emphasis. The PML-N emphasises high rates of GDP growth without much concern for distribution, provision of bricks-and-mortar infrastructure and energy provision. It mentions its success in enhancing growth, bringing CPEC to Pakistan and claims to have ended loadshedding.
The PTI is ambivalent on most issues related to either growth or distribution, but emphasises almost solely the elimination of corruption to kick-start the economy. The underlying concept appears to be that existing institutions and policies are fine as they exist and will deliver growth and development provided that corruption in the political class is eliminated. However, one will say something definitive on its programme once its manifesto is presented. The foremost economic challenge will be to stabilise external imbalances in the economy. Exports have plummeted in the last five years and an unsustainable current account deficit exists, which is depleting both foreign exchange reserves and the value of the rupee. Also, circular debt in the power sector is close to Rs1 trillion. Both issues will require stabilisation of the economy, most likely under the gaze of the IMF. This will be painful as government expenditure will have to be reduced and taxes and tariffs will have to be increased. This is not a happy place to be for a new elected government.
The only consolation will be that every new government is usually saddled with a similar situation. The most important thing to watch out is how effectively the new government can negotiate with the IMF to insulate the poorest and the most vulnerable from the consequences of the stabilisation policies that will be put in place.
Published in Dawn, The Business and Finance Weekly, July 9th, 2018