ISLAMABAD: As the government finally makes up its mind to come up with a mini-budget and address other concerns of the International Monetary Fund (IMF) that are set to further stoke up inflation, the unfolding political uncertainties continue to pose challenges in materialising their reasonable outcomes towards macroeconomic recovery path.
Based on the prevailing and anticipated events in the run-up to the next elections, another IMF programme with perhaps tougher conditions is almost a foregone conclusion but navigating through these troubled waters would not be an easy job.
This comes amid unfavourable international environment marred by high interest and inflation rates, global economic slowdown, uncertain commodity prices and an unending Russia-Ukraine war.
To begin with, the authorities would soon be taking tough decisions that are bitter pills to the voters on the cusp of elections sooner in the two provinces, including the major battleground of Punjab, followed by across the country in general elections.
Getting back on IMF programme won’t be a walk in the park in an election year
A hike in electricity prices by about 30 per cent and even bigger jump of 60-70pc in gas prices coupled with a new set of tax measures and increase in interest rates are key features of the upcoming economic storm.
The combined impact of these steps, according to economists, is estimated to push up inflation, already hovering around 25pc, by another five to 10 percentage points.
“This will have political effects and these will not be palatable,” said an economist, who has been associated with both the previous PTI and current governments.
However, along with these measures a decisive crackdown against three separate foreign exchange markets currently operating in the country would help address a very serious distortion in a system that was already perilously short of foreign exchange, he said.
This happens at a critical stage when the economy is in the midst of stagflation — a disastrous combination of low growth with high inflation. Because of the triple forex market, exports and remittances are declining and inflation is growing because of supply-side problems, he said requesting not to be named.
In the absence of these measures though, the inflation could have gone beyond 50pc in a matter of few weeks as had happened in Sri Lanka and Ghana, now braving over 70pc and 50pc inflation.
The recovery route in that case could be longer and more painful. That is a lesson for both the ruling parties and the opposition to take a mature approach towards the IMF programme, as the next government would be in an even tougher situation to take economic decisions.
The recourse to the IMF programme, according to analysts, was the single-most important outstanding move that should have been taken weeks and months earlier to give a direction to the markets and the international community. Though late, the decision once implemented, is set to partially address the uncertainty and give a signal to the jittery businesses that the coalition government is ready to take serious measures despite political costs.
Reaching an agreement with the IMF would lead to at least $1.2bn in immediate disbursements and would help unleash financial support from friendly countries like Saudi Arabia, UAE and China, and institutional lenders.
The friendly countries have already started saying publicly to support Pakistan with additional resources only after it takes responsible approach and pushes through long-outstanding structural reforms.
The revival of Fund’s programme would also stop a downturn slide, bringing an element of confidence and stability to attract inflows.
A 3.5pc decline in large-scale manufacturing and question mark on agricultural output would nevertheless contain economic growth at the low level currently estimated by various official and international institutions at 1.5pc to 2pc by the end of the current fiscal year.
Inflation is estimated to be on the lower side next year based on higher-base effect of the current fiscal year, which has witnessed repeated domestic price hikes, devaluations and global oil prices.
Dr Abdul Qayyum Sulehri of the Sustainable Development Policy Institute (SDPI) believes that IMF’s conditions include an increase in electricity rate by Rs7.50 per unit, monetisation of gas price losses and system losses, full recovery of Rs50 per unit petroleum levy on all products, and a market-based exchange rate.
Without these, IMF will not roll out its dollars and hence China’s $700 million, Saudi Arabia’s additional $2bn and UAE’s full package of $3bn would remain stuck; and as a consequence, the pledges made at the Geneva conference would not materialise.
Once these funds start flowing, issues relating to letters of credit, or LCs, are expected be gradually settled and the industry would start working.
“These are unavoidable steps in the short term and involve serious political costs,” he said, adding that there were still uncertainties if the incumbent government was committed to pay these costs ahead of elections in two provinces.
The PDM government is at a crossroads. One option for it could be to announce general elections and let the new government with a five-year mandate to take even tougher decisions, but then the crisis would aggravate to great proportions by that time.
In the medium to long term, the new government would have to take all those structural reforms kept pending by all governments starting from Shaukat Aziz, and that would require another IMF programme.
The privatisation of loss-making entities, particularly electricity and gas companies, tariff setting for energy sector by regulators and transparency subsidy operations for commodities like sugar, wheat and fertilisers, etc., had always been supported by all parties when they are at the helm and opposed by them when they are in the opposition.
“When our friends like Saudi Arabia demand reforms before financial assistance, this means no finance minister would ever have the opportunity like Asad Umar to take eight to nine months to seek an IMF bailout,” Mr Sulehri said. “We should not pitch expectations from the international community unless we live up to their expectations.”
Published in Dawn, January 23rd, 2023