The initial signs of economic recovery have started to pour in, setting aside the volatile market conditions triggered by speculations and manipulations coupled with political turmoil. At least the economic data for July is not only encouraging but the fiscal year’s takeoff on a positive note could not have been more opportune for Finance Minister Miftah Ismail facing internal party politics and external pressures amid record-breaking inflation.

The nascent recuperation is expected to be bolstered by an economic bailout by the International Monetary Fund (IMF) when its executive board meets on August 29 to clear the way for the disbursement of $1.2 billion the following two days at a critical juncture when foreign exchange reserves are no more than 5 weeks of import cover.

The steadfast commitment to the implementation of most of the inflationary IMF conditions at the cost of the party’s political capital has helped overcome massive economic and fiscal risks. More than a 40 per cent drop in the import bill in July contributed by the lower oil import bill, belated central bank’s action against market manipulators, confirmation of bilateral funding and resultant clarity on the revival of the IMF lifeline has set in motion a much-needed appreciation of currency — almost 10pc in the first fortnight of the current month — and return of activity in the stock market.

The ease in import ban by the government and reduction in cash margin requirements for imports would give confidence to the market as exports and remittances have started to take care of imports. It has to be kept in mind that targeting import control also had early signs of significant export contraction of more than 20pc in July. Hopefully, it would not be a repeat of the previous PML-N government when exports declined instead of going up with long-term ramifications.

The most worrying aspect continues to be the prevailing political uncertainty that has the potential to unravel economic health that is just coming out of the intensive care unit

At the same time, two major questionable decisions — reversing yet again the taxation on the trader community and doling out scarce public money to top bureaucrats as special allowances — also stand out as a profligate fiscal policy. The fiscal gap, thus emerging from such moves, would have to be filled through a mini-budget within two months of the fiscal year.

But this sends an unfortunate message to the larger public that while the majority of the middle class had been crushed under record-breaking inflation, particularly through higher electricity, petroleum, taxes and gas rates, those with the right connections in the political parties could get away with whatever they like out of the public purse. By all standards, an irresponsible fiscal approach in challenging times.

The sustainability of these signs of improvement is not very certain and will remain subject to a couple of variables. The international prices of major commodities (like oil, fertiliser, wheat and edible oil) appear to be heading towards Pakistan’s advantage but remain significantly unpredictable for example oil prices are moving both ways almost daily. Key forecasts about the global economy are on the downside, which can reduce oil prices and cut Pakistan’s oil import bill, but exports can not remain unaffected by the global recession. How the pendulum moves at least on these two fronts remains to be seen.

More importantly, the lower import bill will have a proportionate impact on Pakistan’s revenue collection as well. The revenue collection in July has seen about 10pc growth against a budgetary target of about 23pc committed to with the IMF under the budget 2022-23 and is thus a key pointer of what may lie ahead unless more ‘mini budgets’ follow over the coming months, starting with one within the current month.

The public has already paid a heavy price for perhaps the country’s toughest fiscal and monetary adjustments and which will have no let up in the near term. Mr Ismail honestly concedes that he has not been able to focus on the two foremost priorities of any finance minister — reducing inflation and increasing economic growth — because of his preoccupation with firefighting to avoid sovereign default. But this should change now and he should revert to his primary responsibility of bringing ease in the lives of the people, particularly the middle class, in the form of lower energy costs and inflationary impacts.

Unfortunately, the energy sector remains the big elephant in the room and there are fewer indications of lowering electricity and gas rates in the near future amid an adverse combination of high technical losses and low recoveries — the two factors are estimated to cost almost Rs700bn this year in the power sector alone — and capacity payments worth Rs1.4 trillion during the year.

With annual inflation at almost 14pc and June and July inflation at above 21pc and 24pc respectively, a good sign is that the central bank has ruled out any further increase in the existing 15pc policy rate, at least in the near future, as the yield on government papers hovers around 17pc. This is apparently for the fact that the recent inflation spike had been a lag impact of administered prices that had been kept artificially lower by the previous government in its sunset days.

In such an environment, the most worrying aspect continues to be the prevailing political uncertainty that has the potential to unravel economic health which is just getting out of the intensive care unit. The multilaterals and international community including the ‘friends’ have sounded in so many words that this may be the last chance for all of Pakistan’s stakeholders to put the house in order. They are fatigued by repeated bailouts and so is the country’s own middle class repeatedly funding the extravagance of the rich, irresponsibility of the key players of the state and increasing cross-subsidisation to the poor.

Published in Dawn, The Business and Finance Weekly, August 15th, 2022

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