The mid of February 2023 was upbeat for the government of Pakistan as they inched closer to the preconditions of the International Monetary Fund (IMF) for the revival of the Extended Fund Facility worth $7 billion. However, the resumption of the programme remains in limbo to date, with the IMF demanding the incumbents to “do more”.
As usual, the general public is bearing the brunt of years of financial mismanagement on the part of the ruling elite, with inflation peaking at 31.5 per cent year-on-year in February.
The unlocking of the $1.1bn tranche seems arduous for the incumbents. The policy level talks, which started in February, are yet to be concluded with the signing of a staff-level agreement (SLA). The government abided by the Fund’s conditions, imposing additional revenue measures worth Rs170bn, introducing a market-based exchange rate, and hiking sales tax and federal excise duty, but the Fund changed its goalpost.
It later demanded confirmation from bilateral lenders to ensure the balance of payments is fully financed, the imposition of a permanent surcharge of Rs3.82 per unit on electricity and the adoption of a hawkish monetary policy. The assistance of China by approving the rollover of a $1.3bn loan and the fulfilment of the further required actions has bolstered the hopes of the authorities, who may feel exalted once the SLA is struck. Nonetheless, the future remains tough.
Loan rollovers and the next tranche from the Fund have to be repaid eventually, thus the only way forward is to diversify and increase productivity
The issue of draining forex reserves is just the tip of the iceberg; there is more than meets the eye. Though IMF assistance will help avert default and pave the way for foreign inflows from bilateral and multilateral sources, nonetheless, strategic reforms are inevitable. The state needs to take on the onerous task of countering the impediments inherent in our economic system, or else the probability of breaking the logjam remains out of sight.
The energy sector, along with most other public institutions of the country, is no less than a white elephant for the economy. The country’s circular debt surpassed Rs4 trillion by December 2022. This menace of circular debt is surging at a rate of about Rs129bn yearly, reflecting the inability and ineffectiveness on the part of the authorities.
A hefty increase in gas prices for residential and other categories of consumers will pour Rs310 billion in additional revenue from the pockets of residential and other categories of consumers into the state’s treasury to comply with the requirements of IMF.
The fiscal deficit is recorded at Rs1.683tr for the first half of FY23 (2pc of GDP). This imbalance is inimical as it leads to increased government borrowing and the consequent need to amplify revenue measures. The tax-to-GDP ratio of 9.2pc in FY22 remains dismal, considering the narrow tax base. This further burdens the active tax-payers and depicts the nonchalant attitude of the government and the elite.
The country is also faced with challenges on the external front. The imports of the country are twice its exports. Though the current account deficit plummeted by 60pc in the first half of FY23 to $3.66bn, its sustainability after lifting the import curb remains questionable.
Policymakers need to consider export diversification. The textile sector forms the predominant part of our export proceeds. Nonetheless, it remains vulnerable to factors like climate change. Any volatility in this sector shatters the balance of payments and the job market.
The exchange rate of the country should be left to the market forces. The steep plunge in the rupee amid the removal of the dollar cap depicts that the inter-bank rate hovering around Rs230 for $1 until January 25 was illusory, which confounded market participants. This led to a widening gap between inter-bank and open market rates and created a huge black market, thus dampening remittances and preventing exporters from realising their export receipts.
Pakistan is the 7th most vulnerable country to the effects of climate change. The glimpse of natural disasters in the preceding year cost the country almost $30 billion. There is a dire need to undertake measures to enhance climate resiliency and shift focus towards renewable sources of energy, along with expediting dam construction. The recent floods were a heads up; insouciance on this front would prove acutely detrimental.
Economic stability is the key to national security and sovereignty. Thus petty politics should be kept at bay, and long-term economic policies should be formulated with all major stakeholders to impede uncertainty and inconsistency. The current political impasse should be resolved at the earliest. This game of chicken will further cost the nation.
The grant of $1.1bn from the IMF, followed by inflows from other sources, would elate the authorities. However, this eventually has to be repaid. Loan restructuring or rollover may provide a respite, but that, too, is to be paid by the nation. It’s high time to realise the need for increasing domestic productivity and setting the house in order, or else the current economic condition will remain ominous.
Published in Dawn, The Business and Finance Weekly, March 20th, 2023
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