Adjustment fatigue

Published March 5, 2020
The writer is a member of staff.
The writer is a member of staff.

LESS than a year since it began in earnest, the signs are now unmistakable that the government is sagging under the weight of the burden that macroeconomic adjustment has placed upon it. It is never a pretty sight to see an elected government begin its term of office by undertaking a large-scale adjustment, which usually means devaluation, rising taxes, shrinking government expenditures. The result is always increased hardship for the people, whether in the form of inflation or unemployment or both.

Read: Economic anxiety

For the last three decades, at least this has been the story of every incoming government. With the initial bursts of pain administered to the economy, via austerity budgets, hikes in power and fuel prices and devaluation of the exchange rate, always come the howls of pain. These are then amplified by rising interest rates in a lot of cases (though not all adjustments have had to see high interest rates). As the economy slows, opportunities vanish, retrenchment rises while inflation and rising utility bills eat up people’s disposable incomes, and feelings towards the new incoming government turn hostile.

Every government has had to undergo this treatment in Pakistan for almost 30 years, if not longer. It is usually a matter of months before they all start to tire of it, and pressure mounts on the finance minister to find some other way to rectify the economy’s imbalances. The ruling party’s own MNAs and coalition partners start to apply this pressure, arguing that repeated cuts in development spending has killed their ability to retain the loyalties of those who had voted them into power. Often, they will resort to forming little pressure blocks, who will tell the finance minister to release funds for development schemes in their constituency, or go to the prime minister and tell him or her that the party has lost its base among the people and should they be asked to stand for election today they will most likely be wiped out by the opposition.

It is hard to think of any large industry in Pakistan that is not dependent on government spending or pricing or buying to keep itself afloat.

Pressure also comes from members of the business community, who are all deeply invested in government expenditures in some way or the other. Many people are pointing out these days how the media is so dependent on government ads and wondering whether this renders it subordinate to government diktat or not.

What is missed in these exchanges is that almost all large industries in Pakistan are dependent on government in some way or the other. For some, the government is their only customer, such as the power producers. For others, the government provides the protections they need to ensure their investment stays profitable and competitors are deliberately kept at bay, such as the auto sector. Yet others rely on government pricing for their profits, such as the oil-marketing companies or sugar mills. And many more rely on government sponsored subsidised credit, tax exemptions or customised gas-pricing regimes such as textiles or leather. Flour millers buy from the government and sell at government-dictated prices.

In fact, it is hard to think of any large industry in Pakistan that is not dependent on government spending or pricing or buying to keep itself afloat. The free market model that the ruling party’s ministers tell the Pakistani media to follow, the search for that alternative model that is free from government spending, does not really exist anywhere. I would like to see one of these ministers offer the same advice to the sugar industry, or tell big fertiliser manufacturers to compete freely with imported fertiliser after their subsidised gas has been re-priced as per market principles. If they do so, they will learn that the government has created for itself a role in every industry as well as the rules of the game by which this role will be played.

These are the rules of the game that get activated whenever an adjustment is undertaken. After the ruling party MNAs and coalition partners have come and gone, there come the business delegations. One by one the government has to sit with these people and listen to their complaints. The reason is that in other contexts, the government relies critically on the cooperation of these very same business delegations, such as in ensuring compliance with tax measures that are rarely successful in this country in the face of opposition from those who are being asked to shoulder the burden of these steps.

A prime minister can refuse to meet these delegations, but eventually will find himself or herself isolated from their considerable influence and voice in the rest of society.

Something along these lines happened late last year when the army chief was constrained to meet a delegation of leading businessmen (and yes, there were no women in that room) from around the country and assure them that their specific concerns would be addressed but the overall contours of the adjustment under way in the country would not be changed.

Fatigue kicks in when the government begins to give off signals that enough is enough. Loud and audible demands from the prime minister begin to be heard from cabinet meetings that he wants to see more spending on ‘pro-poor’ measures, but there is no discernible fiscal plan behind this. We now routinely hear the sounds of frustration from the prime minister. He wants more programmes launched under the Ehsaas programme, but it is not clear how these will be funded. A while ago, he talked of his low-income housing project, but one has little idea how it will be paid for.

All this fatigue building up now is crucial, because the government has to start drafting its budget. That budget will show how far the prime minister has been able to get his way and divert more government funds towards what are known as ‘relief measures’. For these sounds of frustration to be meaningful, for us to be convinced that they are designed to produce more than just a few headlines, there should be some manifest change of direction in the budget.

The writer is a member of staff.

khurram.husain@gmail.com

Twitter: @khurramhusain

Published in Dawn, March 5th, 2020

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