There is little doubt that Pakistan is in dire economic straits. With the widespread flood disaster, a falling rupee and mounting debt, the country faces an uncertain future. No wonder, the Ministry of Finance in its latest monthly Economic Update & Outlook for September pointed out in clear words that Pakistan’s economic outlook has become uncertain.
Moody’s Investors Service downgraded Pakistan’s credit rating to ‘Caa1’ from ‘B3’ and maintained the outlook at negative, as the government’s dollar requirement for financing a widening current account deficit and the risk to sustain debt increased in the wake of recent devastating floods. It also downgraded the rating for the senior unsecured MTN programme to (P)Caa1 from (P)B3, while the outlook remained negative.
Though Moody’s did not foresee Pakistan failing in arranging the required foreign financing as Islamabad remained under the International Monetary Fund’s (IMF) loan programme, it anticipated an increased reliance on multilateral and bilateral creditors instead of going to global financial markets to raise new debt. Giving its rationale for the revised rating, Moody’s said that Pakistan’s economic outlook in the near and medium-term had deteriorated sharply as a result of the floods, as the government’s preliminary estimates put the economic cost of the floods at about $30 billion.
The truth of the matter is that the present government’s handling of the economy has left much to be desired. Miftah Ismail floundered badly and did not know what he was doing. He raised taxes and prices all round, making life difficult for the common man. To rescue the situation the government recently removed Miftah Ismail from the post of finance minister and replaced him with its trusted economic wizard Ishaq Dar.
The change-over has left the country’s economic observers wondering. It has been asked what he can do to improve the economy in the short period remaining before the announcement of the next elections. In the opinion of some experts, the induction of Ishaq Dar during a transitional period has added more uncertainty to the situation.
But Dar is no novice. He is an old player and knows which side of the wicket to play. Previously he kept the rupee artificially high which caused severe damage to the economy. Can he apply the same medicine in the current climate, especially as Pakistan is presently under an International Monetary Fund (IMF) programme?
Defying the odds, Ishaq Dar announced a cut of around 5% in the prices of all petroleum products for the next fortnight, while not increasing the petroleum development levy (PDL). Dar’s decision was welcomed by the hard pressed consumers but it was publicly disapproved by his predecessor Miftah who, in a tweet, termed his decision “reckless”. Replying to the criticism, Dar in a TV interview, defended his decision and retorted, “I will be dealing with the IMF and not Miftah.”
The public display of disagreement between the two key players of the PML-N underlined serious differences within the party on key issues. At the same time, it has raised a host of questions and doubts over the future course of the national economy under Dar. Economists are asking whether the PDM government would take populist but economically damaging measures to shore up its sinking fortunes before the election. This would be counter-productive as the approach under the PTI government was judged as the main reason behind the current economic woes.
There are clear indications that in the coming days Dar would move to lower both interest rate and inflation to arrest the mighty dollar’s upward flight. But whether a cut in the policy rate revives the economy or not, in the current scenario it would only fuel inflation which is already above 24%.
Similarly, the interest rate gimmick can at best act as a palliative and is no long-term solution to our basic economic problems. For, in the ultimate analysis, we need to earn more dollars and that we can do it by boosting exports and attracting foreign investment.
No government, including the present one, has tried to address this issue and all attention remains focused on obtaining loans and more loans. But that is a self-defeating exercise which has landed us in the present economic mess.
It is not yet too late to change course and devise a new package of incentives to promote industrialization and exports. The previous PTI government did succeed in boosting exports from 24 billion dollars to 32 billion dollars but in the last few months the pace has slowed down. Dar would do a favour to the nation if he attended to this aspect of the matter instead of using financial tricks to create an illusion of economic recovery.