BY all indications, Pakistan's economy is headed in a familiar direction. After the successful defusing of 'petrol bombs', the freezing of electricity tariffs, the 50 per cent increase in salaries for government employees, foot-dragging on fixing the power sector and the public-sector enterprises, the setting up of yet another failed idea (Sindh Bank), and consigning RGST to history, there appears to be the suspension of even the pretence of reform.Hence, the desperate search for 'financing' alternatives, such as collecting overdue privatisation receipts and issuing exchangeable bonds in the international capital markets. all
That these financing avenues will provide one-off inflows is beside the point — demonstrating that we are well and truly in the 'wrong part' of the election cycle now, where any move towards meaningful reform is anathema to political parties. Virtually all parties (barring two, perhaps) are part of the wider coalition government at either the federal or provincial levels, with all of them having cosily cohabited with each other for the past three years. Hence, the derailment of structural reform — and the consequent pain that has only been deferred and will ensue at some later stage — is well and truly a 'coalition project' involving all the political parties.
The counterpart of 'financing' is 'adjustment'. Given the political cost of implementing an adjustment (or stabilisation) programme, countries have too often chosen a path of 'financing' over 'adjustment'. Delaying economic reform is inevitably a short-sighted approach, however, which not only merely defers addressing the underlying structural problems, but also increases the 'cost' of doing so.
Stabilisation policies have earned a bad name in Pakistan — partly for understandable reasons. Governments in the past have rarely followed through on the reforms needed (barring in 2000), reneging on international commitments after the disbursement of the first or second IMF tranche. Hence, the positive results of a stabilisation effort have never fully materialised. In addition, governments have undertaken fiscal consolidation in a familiar — and second-best — manner: by slashing development spending.
A combination of the two has invariably diluted the positive impact on growth that a successful adjustment programme can deliver. High-growth countries such as Turkey and Brazil, to name two, have undertaken largely successful — yet painful — episodes of stabilisation before embarking on their current growth trajectory.
Even in Pakistan's recent experience, it was the pursuit of a serious adjustment effort that brought a measure of stability after the country experienced one of its worst macroeconomic crises in 2008, largely a result of policy-induced imbalances inherited from the 2003-2007 period, coupled with the global commodity price shock.
As a result, the fiscal deficit was brought down to 5.2 per cent, from 7.6 per cent in 2007-08, while the external current account imbalance was reduced to 5.5 per cent, from 8.4 per cent of GDP. By the end of 2009, the rate of inflation had declined to 8.9 per cent (from 25 per cent in October 2008). The rupee stabilised after a 25 per cent correction in 2008 in response to a deliberate policy of keeping the exchange rate over-valued for several years. This flawed policy resulted in the large depreciation of the rupee. As the country's foreign exchange reserves built up, confidence of investors and markets returned, with Pakistan's sovereign credit rating upgraded and equity markets entering a prolonged bull-run phase.
The resulting economic stability was achieved at a cost, however. This included a sharp increase in public debt due to recourse to the IMF. With reserves having dropped sharply, there was no other choice. However, contrary to public perception, this was not the only reason for going to the Fund. The discipline imposed by a Fund programme was deemed essential to prevent a slide into further macroeconomic instability.
There is another truth about the sharp increase in public debt since 2008 which has been disingenuously (but not surprisingly) hidden by the debt managers of the past: the new government had to clean up a fiscal mess in which around Rs1.5tr worth of subsidies, restructuring costs and deferred expenditures had been left unrecorded and unprovided for in the previous years' budgets. This clean-up of the fiscal accounts contributed 37 per cent to the increase in public debt recorded since 2008.
The macroeconomic stabilisation undertaken in 2008-2009 under Shaukat Tarin did not stop there. The Economic Advisory Council formulated the 'Nine Point' plan, which was endorsed by the cabinet, and which included inter alia comprehensive policy measures to:
— increase domestic resource mobilisation (with VAT and a wide-ranging reform of tax administration as its key elements);
— improve economic governance;
— enhance productivity in agriculture;
— implement an integrated energy plan for the next 20 years, including steps on LNG import and development of Thar coal;
— restructuring of PSEs;
— reform of the civil service; if when how bad how prolonged
The blueprint for reform drawn up in 2008 and 2009 provided an ideal platform to build on. Unfortunately, given the course charted for the economy over the past one year, a macroeconomic crisis is inevitable. It is not a question of , but , , and , the ensuing crisis will be. While the balance of payments position is comfortable for now, the ongoing second commodity price shock in three years will test the cushion of forex reserves, while the overall state of play in terms of fiscal management will continue to erode whatever remains of economic stability.
In the longer term, it is a misconception to view the available choices in purely binary terms, i.e. that 'macroeconomic stability' is mutually exclusive to 'pro-poor' agendas. Raising revenues by broadening the tax base meaningfully, in conjunction with rationalising bloated government/public-sector expenditures can free fiscal resources, which can be diverted to targeted subsidy programmes.
Ignoring macroeconomic stability, on the other hand, will eventually undermine the ability of the government to influence growth while stoking inflation, both of which hurt the poor the most.
The writer heads a private economic research firm.