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Gaps and deficits

Updated March 10, 2019


The writer is a member of staff.
The writer is a member of staff.

IN the seventh month of its term and the new government is now beginning to figure out the scale and the magnitude of the tasks before it. By reminding us all that they inherited a difficult situation, they are walking in the footsteps of every government that preceded them.

That is how Pervez Musharraf began his (illegitimate) term in power, as well as the PPP government in 2008 and the PML-N after that. Every government sings the same refrain of having inherited a difficult situation, and the nature of the difficulties is more or less the same in every case too: low and falling foreign exchange reserves and high and rising fiscal deficit.

Take a look: These 19 developments shaped Pakistan's economic future in 2018

Every government has had to learn eventually that the problems may have been left behind by someone else, but their resolution is the responsibility of the government in power. There is no getting around this elementary fact. So naturally all eyes turn to the kinds of actions and ideas that the new rulers bring with them, and those they develop in the early months of their rule.

There is a way to go about finding out how much any given government has a handle on tackling the problems they face. First you look at what ideas they talk about in their early days. Then you look at who they are consulting, what questions they are asking, and what possibilities they are either ruling out or locking themselves out of with their political commitments.

Some work is being done, but it appears to be haphazard and driven by contingency.

This tells you what’s in the pipeline and what sort of expertise they are reaching out to. For example, in the very first days of the PML-N government, when load-shedding had hit a historic peak and circular debt had crippled power generation almost completely, they quickly reached out to all heads of the power-generation companies, along with a few others who had experience in dealing with financing the circular debt.

Those consultations last for several days, and even though very little leaked out about the proceedings, it was possible to say with relative confidence that the new government would begin its term by retiring a large portion of the circular debt right away. As it turned out, they went for a total retirement in one go, by pulling funds in from all manner of government accounts sprinkled around the banking system, as well as borrowing.

Likewise, following the early meetings between Nawaz Sharif and the Chinese leadership, it was possible to see that they would be looking towards Beijing for support. What form of support would have been difficult to tell from the information available at the time, but keen observers could say that something was coming.

From Dar’s announcements by the end of 2013, one could tell that they were preparing to pull a rabbit out of their hats regarding the exchange rate, that was seeing speculative attacks growing as reserves remained low despite an IMF programme signed in September. From Sartaj Aziz’s comments in the summer of 2013, only months after the government was sworn in, it was possible to tell that an approach to the IMF was being prepared, and sure enough it came a few months later.

A close watch on what the government is talking about, what political commitments its leadership is making, where the data is going, and who the government is talking to and what sort of course correction measures it is introducing as it moves forward gives one a pretty good idea of what sort of thinking is in play, what sort of solutions are being looked at seriously for certain problems, what rails the leadership will settle upon to get a handle on the situation.

Having said this, consider the following issues. The fiscal deficit is rising, largely on the back of current expenditure and slow revenue growth. The key figure to follow here is the revenue shortfalls that get reported at the end of every month, and the pace of expenditure growth every quarter in the fiscal operations data. What strategies are being mulled to arrest this runaway fiscal situation?

Take a look at the circular debt, that is rising at the rate of almost Rs2 billion per day, going by data between August and January, and is now somewhere around Rs1.5 trillion (fresh data has not been released since the Rs200bn from the Sukuk made its way through the system). What is the strategy to arrest the growth of the debt, to raise recoveries and address power-sector liquidity issues?

Take the foreign exchange reserves, that have stabilised around $8.1bn (net reserves held by the State Bank), but only on the back of four one-off injections of a billion dollars each from Saudi Arabia and the UAE. Those cannot be the basis for a sustainable reserve accumulation programme even in the very immediate term; they’re barely enough for keeping the economy afloat.

Some work is being done, but it appears to be haphazard and driven by contingency. Massive subsidies offered to the exporters are what they are counting on to revive exports. On the fiscal side, we see more tax breaks, and some talk of serving notices, an exercise that has never yielded revenues in appreciable proportion in the past. On the circular debt, we have further borrowing to finance it and no plan for reform in the power sector.

This is no longer an infant government. By now, there should have been a sense of direction. The forthcoming budget now presents them the last opportunity to end this sense of drift, of a government reacting to the day-to-day knocks produced by yawning deficits but no idea on how to sustainably pull itself out of their grip. Time is short, and if they do not seize the moment between now and June, they would have lost the initiative and will become permanently locked into firefighting mode.

The writer is a member of staff.

Twitter: @khurramhusain

Published in Dawn, March 10th, 2019