Road to Washington

Published October 8, 2018

The Pakistan Tehreek-i-Insaf (PTI) government is caught in the dilemma of Imran Khan’s political commitments to deliver on the promise of the state of Madina and the ground economic realities of today’s capitalist world needing prescriptions of the International Monetary Fund (IMF).

The PTI’s economic team has been unluckier than that of the PML-N, which enjoyed an oil bonanza for five years and faced neither a water shortage nor a flood. After an initial course correction, the ruling party of the past enjoyed a modestly but continuously growing economy all along coupled with enough bumper crops to keep the population contented during one of the country’s lowest inflation cycles.

But the PTI faces a bumpy takeoff. All indicators suggest that economic growth is heading south and inflation is going north — a double jeopardy for the public at large. Various estimates put growth forecasts between 4.8 per cent and 5.1pc and inflation in double digits. The cycle takes time to end, but not before pushing people in poverty, joblessness and leaving other adverse impacts on the lives of ordinary citizens.

Fresh engagement with the IMF is important to attain credibility among development partners, bilateral lenders and international capital markets

Exogenous factors appear unfavourable at the outset as international oil prices stage an upward journey amidst harsh global economic conditions for exports and a looming water shortage. Of its own making is its wavering approach to address difficult economic questions, which is emerging as its most crucial challenge in the first eight weeks in office.

It took four meetings of the highest federal economic decision-making body to take the first unpopular decision: the highest gas price hike ever in one go. Its impact is a massive Rs112 billion. The body held seven meetings and yet struggled to be bold enough for a similar power tariff hike.

Of significance are also the opposite positions-cum-compulsions of the political leadership and its economic advisers of the traditional school of thought. The top leader banks on engagements with some friendly countries to avoid an IMF programme — as his political philosophy is built on breaking the begging bowl — or secure reasonable breathing space in the very short term to stay away from the IMF at least for the first 100 days.

Some of his economic advisers, both in and outside the cabinet, think differently. The delay is expensive, they argue, for not only the nation but also the government. The markets are already getting nervous with each passing day of falling external reserves, declining exchange rate and losing share values and market capitalisation.

Instead of wasting time on the optics, they demand tough decisions sooner than later. At best, the optics and economic actions should move simultaneously regardless of the by-elections on Oct 14 or the 100-day agenda.

A government official said that everybody in the PML-N government, except finance minister Ishaq Dar, knew currency devaluation was overdue. Similarly, everybody in the PTI government, except Prime Minister Imran Khan, knows Pakistan is going to the IMF.

They think external challenges are such that all options for fundraising should be used simultaneously and sequenced in a manner that consolidates each other. Friends can be helpful but to a limit, and after that they need an institutional framework to feel comfortable with. Therefore, fresh engagement with the Fund is more important for the country to attain credibility among development partners, bilateral lenders and international capital markets even if its financial support may not be required per se.

The IMF has, meanwhile, concluded that the country faces significant economic challenges, with declining growth, high fiscal and current account deficits, and low levels of international reserves. It has found recent policy measures to be in the right direction, but not yet sufficient. It wants decisive policy action and significant external financing to stabilise the economy.

The Fund has appreciated 18pc currency depreciation since December 2017 and asked for a complete free-float going forward instead of the existing managed free-float. In other words, demand and supply should determine the real currency value and interest rates should be closer to double digits to rein in excess demand. It has welcomed the huge gas price increase, expects a rise in electricity rates within days and seeks a second round of revision by Jan 1, 2019.

The Fund noted these steps would together help reduce current account pressures and improve debt sustainability. Some of these steps would be treated by the IMF as prior actions before an agreement on a new programme and others would become part of the policy matrix against which the programme performance would be monitored. It also wants more tax measures to make up for some of the slippery expenditure targets.

The medium-to-long term focus would then shift to priority areas like modernising the tax system and public financial management, strengthening fiscal federalism arrangements, improving governance and eliminating losses of public enterprises, enhancing the central bank’s autonomy, intensifying anti-money laundering/countering financing of terrorism efforts, improving the business climate and anti-corruption efforts, and fostering economic inclusion of the poor, youth and women.

Finance Minister Asad Umar and his team have largely endorsed the IMF prescription. They share the IMF’s assessment and have already committed to taking “further corrective measures to restore stability and inclusive growth,” adding though that fiscal and price adjustments alone are not sufficient and need to be supplemented by deep structural and institutional reforms.

Published in Dawn, The Business and Finance Weekly, October 8th, 2018



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