FeaturedNationalVOLUME 14 ISSUE # 24

In search of illusive relief

The government has taken some “difficult” decisions to revive the economy but the common people have been crushed by rising prices of essentials, electricity, gas and medicines. If the last financial year was the worst for their household budgets, the next year too does not promise any relief to the masses.


Risks to the economy still persist even after making some harsh adjustments, which have overburdened the common people. Lack of political consensus, instability in prices, rallies by the opposition, rising inflation, low collection of revenue and trade deficit are still major challenges for the economy. In a recent report, the International Monetary Fund (IMF) has identified major threats to Pakistan’s economy. It said its bailout package for the country faces significant risk from a failure to build political consensus around its key components. Failure to get off the “grey list” of the Financial Action Task Force (FATF) could also complicate access to private financing from global markets, it warned.


IMF resident representative to Pakistan Teresa Daban Sanchez put political risk at the top of the list of the risks facing the $6b programme. “In the programme, there are certain actions which require legislation, or change in the legislation, and for that you have to go to the National Assembly. The government right now has no majority to pass legislation. We need to create consensus, we need to convince, and we need to create some kind of support,” she told the audience at a seminar in Islamabad. Her words echoed concerns already voiced by the IMF in its programme document. “The absence of a majority by the ruling party in the upper house of parliament may hinder the adoption of legislation needed to achieve programme objectives,” it said.


Additionally, cooperation of the provinces has to be obtained to generate the kinds of surpluses the government is relying on to meet its fiscal deficit target for the current fiscal year. FATF “grey listing” can jeopardise projected private capital inflows. The government has committed to making amendments to the State Bank Act, (National Electric Power Regulatory Authority (NEPRA) Act, Anti-Money Laundering Act and the State-Owned Enterprise Act as part of the IMF programme. Failure to make these legislative amendments will mean the government will have to seek waivers as the programme reviews get under way. The first review is due in December.


In its earlier report, the IMF had implicitly blamed governments of the Pakistan Muslim League-Nawaz (PML-N) and Pakistan Tehreek-i-Insaf (PTI) for misaligned policies and inadequate policy action, respectively, for the critical economic challenges the country is facing. In its staff report on $6 billion bailout to Pakistan, the IMF provided a background of how the economic difficulties emerged and how corrective measures were delayed. Without directly naming the two governments, the IMF held the PML-N government responsible for unbalanced policies and unfinished reforms. “Misaligned economic policies, including large fiscal deficits, loose monetary policy, and defence of an overvalued exchange rate, fuelled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves,” it said.


While economic growth was relatively fast in the PML-N government— averaging close to five per cent over its five years — macroeconomic vulnerabilities rapidly increased on the back of weak policies supporting a consumption- and import-driven growth model. In particular, procyclical fiscal policies led to a surge in the FY2018 fiscal deficit to 6.5pc of GDP, 2.5pc higher than budgeted, pushing public debt to 75pc of GDP. The IMF said the lacklustre progress in structural reforms continued to hamper investment and allowed inefficient state-owned entities (SOEs) to linger and a large informal economy to expand. While the macroeconomic deterioration, which eroded the stability gains achieved during 2013-16, had been largely due to homemade factors, the increase in oil prices and more limited capital flows added to the difficult picture.


Blaming the PTI government for delayed and unsatisfactory policy action for correction, the IMF noted sizeable foreign exchange interventions continued through April 2019, despite some exchange rate depreciation and significant monetary policy tightening. “Similarly, fiscal slippages in the first half of the fiscal year have been significant despite the adoption of two budget amendments. Finally, increases in power and gas tariffs have not been sufficient to stem the accumulation of quasi-fiscal losses,” it observed.


It also pointed out that sizable short-term financing from bilateral creditors provided critical financing relief, but “also deferred the urgency to tackle the underlying problems while increasing the maturing debt obligations due in coming years”. Therefore, on the back of weakening confidence, economic activity has slowed considerably and inflation accelerated. High-frequency indicators, including the large-scale manufacturing index, domestic cement dispatches and motor vehicle sales, have continued to deteriorate, confirming a marked slowdown in economic activity.


Also, fiscal imbalances have continued to build. Despite the adoption of two supplementary budgets, the overall fiscal deficit (excluding grants) widened to over 7pc of GDP against the budgeted target of 5.1pc. This deterioration is largely driven by a significant revenue shortfall, equivalent to 1.4 per cent of GDP relative to the budget target.


Meanwhile, the State Bank of Pakistan (SBP) has warned the country’s economic growth will further decelerate in the current fiscal year from a nine-year low of 3.3pc in the preceding year due to both internal and external factors. In its third quarterly report on the state of Pakistan’s economy, it said, “The real GDP growth is likely to remain contained. Measures to cut aggregate demand in the overheated economy in the face of hikes in key interest rate would impact economic growth. A likely further increase in power tariffs and recent surge in gas prices would take inflation to a higher side and impact the real economic growth on the local front.”


The reports indicate that the next few years could be harsher for the people of Pakistan than the previous years of their lives. The government may have put the economy on the right path, but it has not benefited the people. The government has added to the problems of the people by not taking action against people who have created an artificial price hike. It will have to act fast to address rising unrest among the masses.