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The emerging team

May 09, 2019


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

AT long last a team, a direction and an idea is emerging of what this government is going to be all about. It has taken more than eight months of floundering, but now finally a team is being put into place that, at the very least, can be considered serious contenders for the posts they are entering.

The only problem for Imran Khan now will be this: the shape of what is emerging is in fact no different from what preceded him. There is a direction, a road forward, but it is the same direction and the same road that the three governments prior to his have walked. In important ways, even some of the people doing the driving are the same.

This has been said before, but it bears repeating: once the macroeconomic adjustment under the auspices of the IMF programme gets under way (after the budget), it will shape and guide the conduct of this government almost totally. The adjustment will afford few ribbon-cutting ceremonies, and breezy promises and photo ops will appear like empty gestures in the face of the large contraction it will induce in the economy, squeezing purchasing power and slashing jobs.

Politicians who smile and wave at their constituents during times of rising inflation and unemployment often become targets of derision and ridicule. Prime Minister Imran Khan will have to adjust his political style and narrative accordingly.

Once the macroeconomic adjustment under the auspices of the IMF programme gets under way, it will shape the conduct of this government.

With Reza Baqir entering the State Bank, some whispers of Egypt and its recent experience with an IMF programme have been in circulation. He was the Fund’s resident representative in Egypt during the years that country implemented a very tough programme, from 2016 onwards. That was a $12 billion Extended Fund Facility that is now drawing to a close as the last of the benchmarks are now being implemented. All IMF programmes look alike from a distance, but differences emerge once one takes a closer look — mainly because every country is unique. It is the same in the case of Egypt and Pakistan.

For example, Egypt suffered from a sharp fall in foreign exchange reserves following a gruelling slowdown in the economy after the events of 2011 and the ouster of Hosni Mubarak. Growth averaged 2.5 per cent per year between 2011 and 2016, unemployment crossed 13pc, inflation hit 14pc, the fiscal deficit touched 14pc of GDP by 2013, and the gross debt of the government crossed 90pc of GDP in 2014.

All these indicators in Pakistan are better today. Gross debt is closer to 86pc of GDP, inflation is less than 9pc, the growth rate is closer to 3pc, fiscal deficit at its worst will still come in at less than 8pc of GDP, and so on. Egypt’s projected external-debt-servicing requirements are still smaller than what projections for Pakistan show, so perhaps the future is more intense for us than it is for them, but for the moment Pakistan seems to have it a little easier.

What complicated things for Egypt is the enormous role that subsidies play in government expenditures there. They subsidise almost everything from fuel to bread to tobacco, to the point where almost a quarter of total government expenditure is on subsidies (the same proportion is less than 5pc here).

Being a net food and energy importer, Egypt has very limited room to roll back these subsidies without inflicting significant pain on its populace. That is what they have had to do under the programme, which has seen large devaluation of the Egyptian pound (there was a 48pc devaluation in one year in 2016) and scale back subsidies to the point where they are now promising “full-cost recovery” in some fuel segments, even though there has been very limited progress in actually curtailing subsidies in their expenditures.

Political turmoil prevented any strong economic focus since the end of Mubarak’s regime, and the turmoil continued until the arrival of Gen Sisi, who ended it basically by ending politics altogether. What seemed like a “revolutionary moment” back in 2011 with the ouster of Mubarak, turned into protracted wrangling during which the economy tanked, only to emerge with the same old status quo that Egyptians have been seeing since at least 1979 — a military ruler and an IMF programme.

Egypt’s crisis was far more intense than Pakistan’s in many ways. The size of the fiscal consolidation that they had to undertake over three years was 5.5pc of the GDP compared to the 4.5pc being asked of Pakistan currently. The trust level between the Fund and the government over there appears to be slightly better than here, given that their programme had two reviews per year, whereas Pakistan has to usually submit to quarterly reviews (though there might be other reasons why this is the case).

Reza Baqir, of course, knows all this intimately, having had a front-row seat in Egypt’s experience with macroeconomic adjustment. Egypt’s government finances are much more invested in underwriting consumption than Pakistan’s, where expenditures are largely focused on paying the government’s bills and development spending (the economy itself is consumption-driven, like most other economies in the world that have undergone liberalisation over the past few decades, but that is a different story).

At the end of their programme, the Egyptian authorities have to show a primary surplus of 2pc (even though the overall fiscal deficit remains above 8pc), and this primary surplus has to continue for years to come in order to bring down the levels of overall debt.

Similar medicine is being prepared here — a programme that aims to bring government finances into a primary surplus, reduce the overall fiscal deficit, bring about currency flexibility, and restore some sense of sustainability to the economy. In the course of doing this, the Imran Khan government will end up looking no different from any of its predecessors, much like Egypt did by the time they got to undertaking their adjustment.

The writer is a member of staff.

Twitter: @khurramhusain

Published in Dawn, May 9th, 2019