Tough times ahead

Updated May 20, 2019

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Just before his resignation as finance minister in February 2013, Dr Abdul Hafeez Shaikh was asked if he could count an achievement as finance minister. He thought for a minute and shot a counter-question: “Don’t you think caring for a patient in an Intensive Care Unit (ICU) is also an achievement?”

At that point, he was not able to keep up with the International Monetary Fund (IMF) because of strong domestic resistance to the Reformed General Sales Tax (RGST) and reforms in bleeding corporations. Yet he kept the Fund ‘engaged’ for almost a year without informing it to avoid a meltdown in the market.

He was considered almost an outsider in the PPP government despite his elders’ role in founding the party. He still succeeded in putting together an impressive economic team, which included Dr Nadeem Ul Haque, Shahid Kardar, Abdul Wajid Rana, Dr Waqar Masood and Salman Siddique.

Independent economists estimate a loss of almost one million jobs during the IMF programme, which is in contrast to Imran Khan’s vision of creating 10m jobs and setting the stage for an Islamic welfare state in his five-year term

The patient is again in the proverbial ICU as Dr Shaikh takes over the job he had left seven years ago in an almost similar situation. As Pakistan enters the 22nd IMF bailout programme, it faces the highest inflation in five years and the lowest economic growth rate in nine years.

Dr Shaikh is building a new team again with support from his Musharraf-era cabinet colleague Jahangir Khan Tareen and talking to almost none of the past friends, except Mr Rana who may soon be taking over as the deputy chairman of the Planning Commission.

Dr Reza Baqir has been borrowed from the IMF to be the country’s first governor of the ‘independent SBP’. He said the latest devaluation was a reflection of market conditions a day after the prime minister ordered action against those responsible for the currency movement.

A market-based exchange rate — read depreciation at this stage — is one of the prior actions in addition to Rs700bn-plus fiscal adjustment in the budget. Other prior actions include policy rate and energy price hikes before the 39-month programme can be formally approved by the executive board of the Fund.

Shabbar Zaidi, a leading name in the auditing profession, has been tasked with improving the revenue system. Members of the technocratic team are still considered outsiders in the PTI government.

Almost all macroeconomic indicators are in decline, thanks to the nine-month uncertainty with a high opportunity cost. Public-sector corporations are no better than they were in 2013 and remain the single biggest drain on the public kitty.

Technocrats tend to ignore the political cost in their proposed road map. That is where the real challenge of the 39-month stabilisation programme emerges. Independent economists are already estimating a loss of almost one million jobs over the three-year period and the same number of people falling below the poverty line. That is in contrast to Imran Khan’s vision of creating 10m jobs and setting the stage for an Islamic welfare state in his five-year term.

The problem is that the IMF programme will continue until the last quarter of 2022, leaving less than three quarters for the PTI government to generate jobs in an election year. The PTI term will end in August 2023.

The IMF conditions are stringent. Pakistan has to ensure timely implementation of prior actions and secure letters of comfort from China, Saudi Arabia and the United Arab Emirates to roll over more than $8bn of their bilateral loans.

Pakistan has to ensure an ambitious structural reform agenda that supplements economic policies to rekindle growth and improve living standards, the IMF said. But it warned that financing from Pakistan’s international partners will be critical to support the authorities’ adjustment efforts and ensure that the medium-term programme objectives are achieved.

“Decisive policies and reforms, together with significant external financing, are necessary to reduce vulnerabilities faster, increase confidence and put the economy back on a sustainable growth path, with stronger private-sector activity and job creation,” the IMF said.

More importantly, a comprehensive plan for the cost recovery in the energy sector and state-owned enterprises will help eliminate or reduce the quasi-fiscal deficit that drains scarce government resources. “Provinces are committed to contributing to these efforts by better aligning their fiscal objectives with those of the federal government.”

This comes at a time the country’s per capita income in dollar terms has dropped over 8pc to about $1,515 from $1,650 last year mainly because of the depreciation. The size of the economy, as measured by GDP, in dollar terms has also come down from $313bn last year to $280bn. The GDP growth rate at 3.29pc is the lowest since 2.64pc in 2010 and way behind the current year’s target of 6.2pc.

In fact, the national economy is generally showing an all-out dismal performance during the first year of the PTI government. The agricultural output growth is 0.85pc against the target of 3.8pc. The industrial sector is growing at 1.4pc against the target of 7.6pc while the services sector’s growth rate of 4.7pc is less than its 6.5pc target.

Also, the government failed to meet investment and savings targets. The investment-to-GDP ratio has dropped to 15.4pc against the target of 17.2pc. The savings-to-GDP ratio stood at 11.1pc in 2018-19 against the target of 13.1pc.

Published in Dawn, The Business and Finance Weekly, May 20th, 2019