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Hinting at the future

Updated September 10, 2018

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The new government’s policies appear to be taking shape with an apparent focus on expenditure cuts and demand compression as it attempts to bridge the twin fiscal and current account deficits.

Almost 400 of the previous government’s development schemes may be cut from the Public Sector Development Programme (PSDP) to provide a buffer of around one per cent of GDP. As of September 7, disbursements for the PSDP are already historically low at just Rs35 billion of a historically high allocation of Rs1.03 trillion.

This time last year around Rs133bn, or 13.3pc of Rs1.001tr, had been released — well within the prescribed speed set for development expenditure disbursement.

In times of fiscal challenge, development programmes are usually the first casualty in Pakistan’s economic policy culture

While the caretakers had put a tight lid on disbursements other than those for strategic projects such as those under the China Pakistan Economic Corridor (CPEC) and water projects; the new government has asked the planning division to put on hold all disbursements for the time being.

In times of fiscal challenge, development programmes are usually the first casualty in Pakistan’s economic policy culture.

Meanwhile, the government is appointing almost every technocrat or economist available in the country to either a task force or advisory committee. Notable exceptions so far are Dr Shamshad Akhtar, Dr Nadeem ul Haq,Dr Salman Shah, Shaukat Tarin and Dr Hafiz Pasha, apart from some others from the PML-N camp.

Most experts on various panels have strongly opposed extending subsidies particularly to Big Fish like fertiliser, basic textile and sugar industries because these create distortions and cost more than they bring back in foreign exchange. All advisors point towards providing support to value added sectors instead.

For the short term, the prime minister has cleared a few ambiguities regarding the recent hike in electricity and gas rates — in line with advice from economists recommending taking tough decisions at an early stage despite a consequent loss of political capital — the decision is yet to be implemented pending finalisation.

A $1bn plan to contain imports by increasing or imposing fresh regulatory duties on about 1,200 items is also almost ready. Authorities are reported to have tentatively lined up enough resources to bring down the gap for a minimal balance of payment support from the International Monetary Fund (IMF) — around $3-4bn instead earlier contemplation of a double-digit bailout package.

As in the past, allies like China and Saudi Arabia are believed to have given fresh assurances of another one-time monetary support package consisting of a grace period, new facilities and credit lines for investment and trade.

This, coupled with Diaspora bonds, Islamic Sukuk and real estate equity investments should put Pakistan in a stronger negotiating position with the lender of last resort whose certificate of economic good health can pay dividends from traditional bilateral and multilateral lenders.

A few economists have also proposed that in addition to the prime minister’s fund which aims to raise capital from Pakistani’s abroad, the government should offer special infrastructure bond based investments for specific projects like the Diamer-Bhasha dam. Assets are already being identified and valued for Islamic Sukuk.

As the short term challenges subside, the government will need to focus on long term development challenges — job creation, poverty reduction, sustainable development, higher productivity and human development. Both economists and the government have agreed to discuss these issues this week as part of three different working groups: debt, fiscal and current account deficit; and develop a plan of action to be presented before the parliament.

Finance Minister Asad Umar has already indicated he is not in favour of withdrawing the tax relief announced by the PML-N as a departing gift to the middle class, saying doing so would raise a hue and cry.

On the sidelines of finalising its economic policy direction, the government has to speed up preparations for compliance with the requirements of the Financial Action Task Force (FATF) and satisfy at least two delegations over the next few days — one coming directly from FATF headquarters to be followed by another from its regional affiliate the Asia Pacific Group for on-site verification of some 40 or so performance indicators, in early October.

The outcome should ensure that Pakistan gets out of the grey list by September 2019. This will have a positive psychological impact on inflows into Pakistan whether in the form of bond proceeds, exports or remittances.

Published in Dawn, The Business and Finance Weekly, September 10th, 2018