Urgent challenge

Published March 2, 2024

PAKISTAN has been in a state of deep economic turmoil featuring a balance-of-payments crisis, high fiscal deficit, elevated inflation, unsustainable debt, low investments and a shrinking economy in recent years.

The reasons for the current upheaval range from defective fiscal and economic policies, and the global energy and commodity price spiral post-Covid, to the destructive floods of 2022. The political instability, ongoing since the 2022 ouster of the PTI, has only aggravated the economic tumult, with the country narrowly dodging a default last summer after being thrown an emergency lifeline by the IMF.

This picture underscores the huge challenge that awaits the incoming minority government of the PML-N and its finance minister whosoever it might be.

It was also acknowledged by former prime minister Nawaz Sharif when he warned his party’s elected lawmakers earlier this week that the next two years would be challenging for the new administration due to economic and political uncertainty.

There is consensus that negotiating a new extended programme with the IMF — and quickly — to replace the existing interim facility will be the incoming finance minister’s most urgent challenge. The successor IMF bailout is critical for external sector stability and to unlock loans from other creditors at one of the toughest points in Pakistan’s history.

Without an extended package from the global lender, it would be near impossible to fill the huge annual financing gap of at least $25bn over the next several years.

The IMF will likely extend help but not unless the authorities commit to further belt-tightening steps needed for the country to stay on the path to recovery. The programme goals might prove extremely unpopular because they would limit the government’s options to provide relief to the inflation-stricken people, or even please the investors looking for support to spur growth.

One of the toughest goals for the finance minister pertains to a large reduction in the fiscal deficit, which has averaged over 7.3pc over the last five years. The fiscal authorities must reduce the deficit to 3-3.5pc in the medium term to cut borrowings and the mounting debt, and reduce inflation to 5-7pc to facilitate rate cuts to spur investment and growth for job creation.

This is going to be the hardest of all reforms as it would require the finance minister to effectively tax his party’s core constituencies: retail, real estate and large farmers, as well as do away with the wasteful expenditure on public sector businesses like PIA and eliminate energy and other subsidies to powerful business lobbies.

These are also areas wherein lie the interests of the powers that be. If the country is to be pulled back from the brink, the incoming finance team will have to prioritise economic decisions over political considerations and personal whims.

Published in Dawn, March 2nd, 2024

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