FeaturedNationalVOLUME 18 ISSUE # 18

Consistency in policies the only way out

Pakistan needs massive international support to contain losses from devastating floods. However, it will have to continue tight economic policies to avoid a point where it had reached before receiving the IMF bailout.

Pakistan’s biggest problem has been lack of consistency in its policies. International financial organisations have pointed out flaws and weaknesses in Pakistan’s economy to successive governments. Every government also took some remedial measures to improve the economy in its initial months and years, but later abandoned them for political gains as elections approached. The present government also faces the same dilemma. It will have to continue its policies to consolidate economic gains in the rest of its tenure. Its “harsh” measures have already made it highly unpopular in the government. It lost by-polls in Punjab and the government in the province because of high prices caused by its policies to contain losses to the country.

However, the government should be appreciated for its steps to improve the national economy at the cost of its popularity. In its latest report, the IMF also applauded the government for removing subsidies on fuel and electricity and marinating a flexible exchange rate. “To combat inflation, the State Bank of Pakistan (SBP) should remain ready to continue the tightening cycle. The central bank had agreed to maintain a tight monetary policy and to take decisions regarding it in a forward-looking and data-driven way,” it noted. According to the report, the SBP has also agreed to continue reducing the subsidies on refinancing facilities and phase out its involvement in the schemes for which it would prepare a transition plan by the end of this year. “The authorities have advanced work on an initial plan in consultation with other stakeholders, and bringing the pricing of these schemes closer to market rates will limit their demand and thus facilitate their phasing out with the activity transferred to an appropriate Development Finance Institution,” it observed.

The IMF also advised authorities to continue to allow the market to determine the exchange rate and avoid suppressing any trend movement. A market-determined exchange rate would remain effective at absorbing shocks and is essential for reducing external imbalances and shoring up foreign reserves. “Allowing a greater role for exchange rate flexibility to address external pressures will help safeguard and improve reserve buffers towards more prudent levels in line with programme targets,” it maintained.

However, it warned that high inflation and tighter global financial conditions would continue to weigh on Pakistan’s economy, pressuring its exchange rate and external stability. It said the average Consumer Price Index (CPI) inflation was expected to surge to 20pc in the current financial year while core inflation would also remain elevated due to higher energy prices and the rupee’s decline.

The IMF said risks to Pakistan’s economic outlook and implementation of the programme remained “high and tilted to the downside” because of what it termed a “very complex” domestic and external environment. “Spillovers from the war in Ukraine through high food and fuel prices, and tighter global financial conditions will continue to weigh on Pakistan’s economy, pressuring the exchange rate and external stability. Policy slippages remain a risk, as evident in FY22, amplified by weak capacity and powerful vested interests, with the timing of elections uncertain given the complex political setting. Sociopolitical pressures are expected to remain high and could also weigh on policy and reform implementation, especially given the tenuous political coalition and their slim majority in Parliament,” the report added.

Other risks to the economy include higher interest rates, a larger-than-expected growth slowdown, pressures on the exchange rate, renewed policy reversals, weaker medium-term growth, contingent liabilities related to state-owned enterprises and climate change. The IMF said real GDP growth, which has been above-trend for the last two years, was expected to reduce to 3.5pc in FY23 and gradually return to 5pc. Domestic demand is projected to notably reduce as energy prices were passed on to consumers and activity was dampened while purchasing power would be lost due to high inflation.

The current account deficit would decline to 2.5pc of the GDP in FY23 compared to 4.7pc of GDP in the previous fiscal year. This would improve the reserve coverage of imports to 2.3 months from 1.7 months currently. Public debt would fall to 72pc of GDP at the end of FY23 because of a tighter fiscal policy and inflation eroding the value of rupee debt. “Supported by the planned fiscal adjustment and robust growth, public debt is projected to follow a downward path towards 60pc of GDP by FY27, with external debt declining toward 25pc of GDP,” according to the IMF.

Many positive signs are already visible on the economic front. Pakistan’s trade and current account deficits are continuously decreasing, while tax collection has been on the rise, while remittances remain high.

However, the IMF cautioned that high food and fuel prices could trigger protests and instability, which could, in turn, jeopardise macro financial and external stability and debt sustainability. This is the situation every government has faced in the past. It is high time all political parties took measures to ensure political stability in the country to improve its economy for the betterment of its people.