The prevailing political uncertainty arising out of a no-confidence motion against Prime Minister Imran Khan is leading to serious and lingering economic uncertainty. The global geo-political situation following the Russian invasion of Ukraine is having a multiplying effect.
The combination of the two is like a culling machine. Foreign exchange reserves are falling as import bills on the back of oil prices grow, bond yields are increasing, and remittances are straightening out while financing needs increase amid rupee depreciation, double-digit inflation and stock exchange on a downhill path.
This all is a source of perpetual pain for millions of citizens. But the biggest challenge for any government after the political turmoil settles down would be how to absorb the costs of policy distortions that have crept into the system over the past few weeks.
It would cost a lot of political capital to reverse discounts on electricity and oil prices with a four-month freeze to pre-relief level once prudent economic sense prevails. The resultant increase in the circular debt and fiscal deficit otherwise will have their own lagged impact in the shape of inflation and higher debt. These cannot be wished away with delays and indecision.
The fundamental economic challenges are back to square one despite a lot of pain absorbed by the citizens over the last couple of years
As if that is not enough, there is no clarity at all at this moment on how the domestic political and external factors behave in the near future. The possibilities in terms of survival of the current government, an interim government and the term of its tenure or the general elections and the future government have varying degrees of economic costs. The Ukraine crisis is already turning global economies upside down soon after the Covid-induced recession.
The preoccupation with political crises is already having an impact on decision making and governance. The prime minister has not been able to hold a meeting of the federal cabinet for almost a month against the normal weekly schedule. Among the lost list of items on the agenda of the scheduled but cancelled cabinet meeting on March 1 included a mid-year review of the federal budget 2021-22 and key economic indicators. The normal workings at the federal secretariat have also been affected as bureaucrats adopt a ‘wait & see approach’ on day to day running of the government.
That is also where the talks between the International Monetary Fund (IMF) and Pakistan authorities remain inconclusive. While the initial objections revolved around populist moves, particularly the relief package, announced by Prime Minister Imran Khan last month, reversing a major impact of the mini-budget under IMF prior actions, the concerns have now shifted to the future of the ongoing IMF programme. Reneged IMF targets would come back to haunt future Pakistan governments and people in the shape of even more stringent prior actions.
With the no-confidence move by the joint opposition, the scope of these concerns has rather expanded, adding fuel to the uncertainties. The more relevant anxieties now pertain to questions if an interim set-up could carry forward the remaining part of the Fund programme and whether or not it could return to the mini-budget announced in January and what if a future majority in parliament shuns ownership of the State Bank law.
In such circumstances, the IMF staff may hesitate to bring up Pakistan’s case before its executive board for the remaining tranches at least before the upcoming spring meetings in the third week of April. Perhaps because of such an eventuality, the government had taken a wish list of about $21 billion financial support from China during Prime Minister Khan’s visit. This included about $4.3bn debt rollover maturing within the current month.
Pakistan expected an arrangement with China with the consent of the IMF to have access to a part of the $40bn increased quota the Fund had allowed to China as part of its Covid-19 quota expansion to member countries. On return from Beijing, Prime Minister’s Special Assistant on CPEC Affairs Khalid Mansoor had told a news conference that Chinese leadership took note of these requests and promised to consider and then communicate their decision accordingly in response to questions about Pakistan’s request for the $4bn debt rollover, extension in currency swap from the existing $4.5bn to $10bn and $5.5bn in additional financial support.
While authorities anxiously await a formal response, the political uncertainty may have some ramifications here too as Chinese leadership may like to steer clear of the situation. The current account deficit, in the meanwhile, has reached almost $12bn in the first seven months with full-year projections at around $18-19bn — a level the PTI had inherited in 2018.
Even though the PTI government did not inherit an ideal situation, its indecision or delayed decision to go back to the IMF cost the country dearly. Amid tough stabilisation policy, the worst ever health pandemic rather came as a saving grace as international lenders, particularly the IMF, opted for an accommodative policy and provided additional financial assistance with almost no strings attached.
But the authorities failed to push through long-standing structural reforms and instead came up with three money-whitening schemes. Also, it diverted more funds out of external support to big businesses rather than making them efficient and competitive. The belated increases in electricity rates aimed at containing circular debt have been brought back to a level initiated two years ago.
The fundamental economic challenges are back to square one despite a lot of pain absorbed by the citizens over the last couple of years. Pakistan again stands at the crossroads it comes across every election cycle. The difference this time is that challenges are greater than before and remedies may also be even tougher as uncertainties prolong.
Published in Dawn, The Business and Finance Weekly, March 21st, 2022