KARACHI: As the economic story of PTI unfolds, this week will stand out as a pivotal moment when the government finally begins to acknowledge economic reality.
The week began with the government in thick of consultations with a visiting delegation from Saudi Arabia making a visit to Gwadar and Reko Diq gold and copper mines, and ended with a grudging acknowledgement from the finance minister that his government was willing to swallow the bitter pill of adjustment and reform.
“Going forward, the government is committed to taking decisive corrective adjustments to restore the economy on a path of stability and growth” said a read out from the finance ministry issued on Friday. A bloodbath followed on the financial markets, as the stock market fell by 860 points in a single day.
Friday’s read out from the finance ministry was inevitable because late on Thursday night the International Monetary Fund (IMF) had pronounced its own dire prognosis, after ten days of detailed consultations with all tiers of the country’s economic management.
“Pakistan is facing an increasingly difficult economic situation, with high fiscal and current account deficits, and low international reserves” the fund’s statement began, and went on to sketch a painful series of steps that will be required to stabilise the situation.
Those steps included “more exchange rate flexibility and monetary policy tightening” as well as continued fiscal adjustment, meaning more taxes. It also called for “further increases in gas and power tariffs”, the bugbear of all political governments. These steps alone are sufficient to kill all campaign promises of any political party.
Although the IMF statement did not give any figures for where the exchange rate ought to be, or how far interest rates might need to rise or how much more revenue needs to be generated to stay within the fiscal deficit target of 5.1 per cent of GDP, reports in the media sourced to Pakistani government officials who were part of the deliberations painted a bleak picture.
According to these reports, the fund wanted interest rates at 12.5pc by June, which would represent a four percentage point hike from where they stand today – a point reached after a steep series of hikes implemented since January. Clearly we are only part of the way down the road of adjustment, with much of the real economic pain yet to come.
On Monday however, the government’s outlook was a lot sunnier. Word was that the Saudis are about to come in with a $10 billion investment and the chatter on TV and social media was all about the budding close ties between the Kingdom and the Republic, and how Saudi Arabia will make a valuable “strategic partner in China-Pakistan Economic Corridor (CPEC)”. By Tuesday that chatter ended when the government made clear that Saudi Arabia will not be “joining CPEC”.
Tuesday saw the last day of IMF delegation in Pakistan, and the finance minister held his au revoir interaction with them late afternoon. The very next day the cabinet finalised the notification of gas price increase, a key signal of serious intent for the IMF, and Oil and Gas Regulatory Authority (Ogra) issued the notification the following day on Thursday.
On Thursday, State Bank reported one of the steepest falls in the foreign exchange reserves, attributed to a bulky debt servicing payment. That was also the day the first report emerged that the Prime Minister has been informed by three of the senior most members of his economic team that the IMF is the only viable option for Pakistan. All talk of collecting billions from overseas Pakistanis or “recovering looted wealth” as a means of plugging the major deficits of the economy now needs to end.
It is not known how Prime Minister Imran Khan received this news. He has been a keen advocate of fixing Pakistan’s economy through “recovering looted wealth” and appealing to overseas Pakistanis. Even in his inaugural televised address to the nation, he spoke about the macroeconomic deficits, and in the same breath spoke of seeking help from overseas Pakistanis and ramping up the search for looted wealth stashed abroad.
All that talk now leaves the economic conversation, which will be about regulatory duties and audits, expenditures cuts and fiscal discipline, in addition to tackling the fallout on the public perception of the PTI and the outcry that is already getting going from the business community.
The whimper with which the government acknowledged its economic predicament on Friday was followed on Saturday by the news of the arrest of Shehbaz Sharif, the leader of the opposition.
The next week, it seems will open with the government on the back foot on the economy, and in combat mode with the opposition. How that plays out remains to be seen, but the pivotal place of the outgoing week is undeniable.
Published in Dawn, October 7th, 2018