The National Assembly finally elected a new prime minister following over a month of political turmoil, narrowly escaping a constitutional crisis that threatened to pit the various arms of the state against each other. There is, however, a much bigger challenge awaiting the newly formed coalition government, headed by Shehbaz Sharif — how to revive a haemorrhaging economy.
That the economic crisis is dire is no secret — even the Supreme Court, while hearing arguments from all parties, questioned Shehbaz how he planned to tackle it. In response, the then opposition leader pointed to a "Charter of Economy", which he had presented in the National Assembly in 2018.
Undoubtedly, it will take much more than a charter to address the myriad of problems plaguing the economy — the looming current account and fiscal imbalances, depreciating rupee and inflation — all of which require an immediate response.
The new government will have to make some difficult choices to correct these external and internal imbalances. Given the nature, severity and speed of the crisis, the policies to correct these imbalances need to be put in place immediately in a way that the burden is not shifted to an already vulnerable population on the lowest rungs of the economic ladder.
This requires a balanced mix of policies, which on the one hand, correct these imbalances and on the other, compensate and protect the poorest of the country from the side effects. Therefore, the new government needs to develop a consensus on a minimum immediate economic agenda. This is particularly critical for at least three reasons:
- It is a government of allies, each of whom has very different priorities, agendas and approaches towards the economy. The absence of a common economic agenda, therefore, can delay relief for the common man.
- Given the serious political volatility, the government may choose prioritising accountability over the economy. This will further exacerbate the problems faced by citizens.
- A government preparing for elections will be unwilling to take any economic policy measures that may cost votes. For example, it may opt to maintain the subsidies on petrol and energy prices from the PTI government's relief package to please the voter base and avoid taking the blame of adding to people's problems. This will, however, worsen the already deteriorating fiscal imbalances.
Keeping these challenges in mind, the following minimum immediate economic agenda for the new government is proposed:
Keep politics out of economics
The country has already seen much of politics, with the situation becoming increasingly volatile over the last year and a half. What the country and the market need now is stability.
While important, issues like accountability and controlling corruption can be put on hold until a fresh mandate is taken via elections. The political turmoil has already done a great deal of damage to the economy, adding to the sufferings of the public at large. The focus must now shift towards actions concentrated on improving the lives of the common man.
Make tackling inflation a priority
The government must think it has a tenure of 100 days only and avoid introducing any ambitious agenda of reforms and new programme rollouts. Its economic agenda must be focused on improving the lives of the common man immediately. In short, the government must make controlling inflation its number one priority.
According to data from the Pakistan Bureau of Statistics (PBS), consumer price index (CPI) based inflation stood at 12.72 per cent in March, compared to the same month in the previous year. It is important to note that this number may be underreported due to the ousted premier’s relief measures of freezing energy and petrol prices. Adjusted for this, the actual inflation may be higher — at somewhere around 15pc. Worryingly, the sensitive price index, which includes the prices of essential food items, was recorded at 17.87pc year-on-year in the first week of April, according to the Pakistan Bureau of Statistics.
While corrective measures at a more fundamental level are essential to curb inflation, immediate action is warranted. The government can immediately put in place administrative measures to keep a check on the artificial price hikes of goods, particularly food products. It can also use district level price control committees to stem undue profiteering.
The district managers — the commissioners and assistant commissioners — must be strictly tasked and monitored to curb hoarding and smuggling of essential commodities. Random market visits of price monitoring officers to strictly implement official prices at the local level can help keep a check on artificial price hikes.
In addition to other drivers, a loose commitment to control prices and inflation will make it difficult to slow down inflation.
The newly formed government must, therefore, clearly convey and through its actions, prove that controlling inflation is its foremost priority and that it will not let anyone distort it. The online price control and monitoring system developed by the Pakistan Information Technology Board (PITB) can also be used to monitor artificial price hikes at district wholesale and local markets to achieve this goal.
Continuing existing social programmes that benefit people
The government must continue its predecessor's beneficial programmes. If anything, the country's most vulnerable population must be provided social protection in a more effective way. For example, cash payments to poor households may be made monthly, instead of quarterly — the latter may not be the best approach in a consumption smoothing programme.
While unpopular, the new government must also provide targeted subsidies instead of politically driven blanket subsides such as petrol price cuts that least benefit the poor. Cutting unproductive subsidies will be the new government's biggest challenge.
Complete the IMF programme
Pakistan has had a bumpy ride with the IMF Extended Fund Facility so far. The politics around the programme, deviations and departures from commitments and priors has already cost us much. The outgoing PM’s last relief package was virtually an exit announcement from the Fund, with talks on the seventh review in jeopardy yet again.
It may be an unpopular decision, but exiting the IMF programme at this point will further exacerbate economic woes. The country will find it very difficult to borrow from the international market, and amid the record high current account deficits, the Fund closure can increase pressure on the rupee.
Avoiding any populism, the government must therefore sit with the IMF. It may clearly communicate that as it is here for a very short term, it can only deliver on some of the doable conditions.
For example, a petrol and energy price freeze until June is not viable. The government must gradually open the price cap. On the other hand, the lender must be convinced that some of its proposals to control the fiscal deficit, such as a flat 30pc tax on the income bracket between Rs0.1 million to Rs1 million, are difficult to implement at this point in time.
Reconsider positions on policy issues, such as SBP amendment act
The government must understand that low and stable inflation is essential to improve living standards and attain sustainable economic growth. Only an effective monetary policy, with clear targets and the autonomy to apply required instruments, can deliver this. The SBP Amendment Act 2021 provides this opportunity.
Admittedly, the bill was presented and passed without taking the opposition on board. Based on its position taken as the opposition, the government must not act to reverse or revoke this bill. It will create huge economic policy uncertainty, which will affect the public at large in the decades to come. There is substantial margin for improvement in the law, but it is a step in the right direction. This also holds for other policies, such as flexible exchange rate etc.
To sum up, the new government may have come in after months of political turmoil, but its work is just beginning.
It must prioritise the provision of relief to the people of Pakistan. This will require a clearly defined minimum economic agenda, besides ensuring that the policies to achieve this agenda are put in place without further delay.