Breathing space

Published May 16, 2024
The writer is a macroeconomist and a former advisor to the Ministry of Finance.
The writer is a macroeconomist and a former advisor to the Ministry of Finance.

LITERATURE, including several cross-country empirical studies, highlights three broad macroeconomic outcomes of a country’s programme engagement with the IMF. Programmes lead to an improvement in the current account deficit, a build-up in foreign exchange reserves, and a fall in inflation albeit at a slower pace. This can broadly be defined as macroeconomic stabilisation. The consequent effect of adjustment policies used to achieve some level of stabilisation is a slowing of economic growth, at least in the short run.

Since embracing the Stand-by Arrangement (SBA) with the IMF in July 2023, Pakistan’s economy is behaving according to the book. The current account deficit has been restricted to $0.5 billion during July-March (FY24) compared to $4.1bn in the same period last year. Foreign exchange reserves with the State Bank rose from a meagre $3.9 billion in June 2023 to $9.1bn on May 3, 2024. Inflation tapered off from a high of 38 per cent year on year in May 2023 to 17.3pc in April 2024. Growth is estimated to remain subdued at nearly 2pc for FY24. Pakistan’s economy has reacted in the way economies are expected to respond when they enter into an engagement with the IMF.

Also, the SBA helped avert debt default in July 2023, stabilised the rupee’s free fall, and ensured that other lenders (bilateral, multilateral, and friendly countries) come on board to plug Pakistan’s external gross financing gap, at least for FY24. Unfortunately, new commercial funding and international bond issuance remain out of reach. Engagement with the IMF has enabled Pakistan’s access to new debt to pay off the earlier one, fund the current account deficit, and thus stay afloat. Hence, Pakistan’s external public debt rose from $94.8bn in June 2023 to $98.1bn in September 2023 and to $99.7bn in December 2023.

The adjustment policies under the SBA helped stem the alarming slide of the economy. These policies included a tighter monetary and fiscal stance and a flexible exchange rate regime to curb imports and push exports. In Pakistan, energy sector price pass-throughs are an additional conditionality as we delay adhering to regulators’ price determinations. The nine-month SBA gave policymakers the necessary breathing space to embark on a reform mission to remove the distortions in the economy.

Deep reforms are the only way to repair economic fundamentals.

So where do we go from here? We know that macrostabilisation is a necessary but not sufficient condition for sustainable growth and prosperity. Deep reforms are the only way to repair and meaningfully alter the economy’s fundamentals. A growth framework based on unleashing a competitive domestic private sector, redesigning Pakistan’s crumbling energy sector away from the public sector-led constellation, and repairing the fiscal framework are akin to survival.

Severe weaknesses in these areas have put the country in a perennial liquidity crunch in the external, energy, and fiscal sectors. Due to the shortfall of both dollars and rupees, the state has limited resources to materially improve the lives of the millions living an impoverished existence. They are debilitated by the poor quality of healthcare and education in a country which has weak opportunities and rising inequality. It is of little surprise that with each passing day, the citizenry becomes more dissatisfied with the functioning of a lethargic state and feeble democracy.

A successful attempt to reform the economy demands a few prerequisites. First, those at the helm should alter their perception of government func­tioning. They have to see the government as an enabler, not a deliverer.

Second, some serious islands of competence and expertise are ne­­eded within the public sector. Un­dertaking ref­orm surgeries and executing the next Extended Fund Facility (EFF) will be difficult with a weak professional team.

Third, when we look at Pakistan’s medium-term macro framework, we realise that the numbers on investment, productivity, exports, and debt will improve only marginally without a home-grown Herculean effort. That leads us to the fourth and last of the prerequisites — the realisation that whereas another programme supported by the IMF is a necessity, reconfiguring the economy on a productive footing goes much beyond the purview of a three-year EFF facility.

Neverending technical assistance and foreign-funded projects have had little impact on a dysfunctional tax system. This should be an eye-opener to take matters into our own hands. The nation waits for the government to redefine its functioning based on the ideas highlighted by the aforementioned four prerequisites. The nation must hold the policymakers’ feet to the fire on all these counts to ensure accountability.

The writer is a macroeconomist and a former advisor to the Ministry of Finance.

X: @KhaqanNajeeb

Published in Dawn, May 16th, 2024

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