FeaturedInternationalVolume 14 Issue # 14

Living with painful reforms

Pakistan will have to make wide-ranging structural reforms to secure a bailout package from the International Monetary Fund (IMF). Electricity and gas prices are set to increase further, which will add to the suffering of the common man.

Prices of every daily-use item have already increased after electricity and gas tariff was hiked by the government after coming to power. Naan and roti prices have jumped to Rs12 from Rs10. Medicine rates have increased by 15pc recently. The government’s policies have only hurt the common people and more adjustments mean more trouble for the people. Prime Minister Imran Khan must have realized that governing Pakistan is far difficult than making tall promises while being in the opposition. He has inherited an economy, which is on the verge of collapse and his attempts to revive it have only overburdened the common people.

The World Bank has painted a gloomy picture of Pakistan’s economy. In its latest report, it projected Pakistan’s GDP growth to decelerate to 3.7pc during 2018-19, as against 5.8pc last year, with financial conditions tightening to help counter rising inflation and external vulnerabilities. Pakistan will have to make financial adjustments of over Rs1.4 trillion in the next two years, if an IMF package is finalised. It means Rs1.4 trillion more will be extracted from the pockets of the people in the next two years. Pakistan’s circular debt in the energy sector has reached Rs1.64 trillion from about Rs1.3 trillion by the end of September last year. The government plans to borrow another Rs200 billion to help clear the power sector debt, which is destabilising the finances of the government and private power producers.

The government’s major concern is the political and economic cost of the painful IMF programme after rising inflation amid higher energy prices have already crushed the poor. Transmission losses in the power sector have increased to 4.3pc in January from 2.6pc a few months ago while gas losses remain over 12pc. Gas and electricity rates were raised a couple of months ago by up to 30pc and 15pc, respectively, and they are set to go further up by 30pc by June. The IMF wants the next year’s tax revenues to expand to close to Rs5 trillion from the target of about Rs4.4 trillion this year. Improving the State Bank’s autonomy, a market-based flexible exchange rate and reduction in the debt rate are other key demands of the IMF.

Experts say the government was slow in comprehending the precarious macroeconomic situation of the country and it should have talked to the IMF immediately without wasting so many months. A rapid decline in foreign exchange reserves, at almost $1 billion a month, even after considerable replenishment, is stark proof the current account situation is still serious. With large debt repayments due over the next few months, the situation could turn alarming. Although the government has secured breathing space through Saudi Arabian and United Arab Emirates loans, yet an IMF programme is essential to pave the way for access to resources from other multilateral lenders, like the World Bank and the Asian Development Bank, as well as global capital markets. Experts, who support the government on its delaying tactics, say it is the first government that has resisted an IMF package for as long as it could to save the people from its painful effects.

According to the State Bank of Pakistan’s first quarterly report on the state of Pakistan’s economy for FY19, the overall macroeconomic environment remained challenging during the first quarter. The primary concern was the steep rise in global crude prices, which not only reinforced the already strong underlying inflationary pressures in the economy, but also eclipsed emerging improvements in the external sector. Fiscal pressures also remained intact as expenditure rigidities allowed only a limited room for the government to maneuver. Responding to the challenges, the new government immediately announced cuts in development spending, partially reversed tax relief measures, and also explored avenues to bridge the external financing gap. The 6.2pc target for real GDP growth seems unachievable with the policy focus now tilted towards macroeconomic stabilization. The production of all major crops remained lower as compared to the last season, due to lower water availability, which led to a decline in the total area under production. On the external front, the report highlighted that the continued exports growth and a steady increase in workers’ remittances partially helped contain the current account deficit. However, the level of the deficit remains a concern, as rising oil prices resulted in the quarterly import bill crossing the US$ 4 billion mark.

Pakistan’s debt and liabilities have skyrocketed to Rs33.3 trillion at the end of 2018, with an addition of Rs3.4 trillion in six months. By December, total losses of public sector enterprises surged to Rs1.6 trillion, a net addition of Rs192.6 billion or 13.8pc in the past six months. External debt and liabilities of Pakistan mounted to $99.1 billion as of December 2018, according to the central bank. However, Pakistan’s trade deficit has shrunk by 9.66 pc during the first seven months of the ongoing fiscal year 2018-19. Pakistan’s exports remained $13.23 billion, while imports were recorded at $ 32.49 billion during July to January 2018-19. The trade deficit witnessed more than $2 billion reduction during the period, according to the Pakistan Bureau of Statistics. The government is expecting $5-6 billion reduction in the trade gap at the close of the year.

Prime Minister Imran Khan understands that Pakistan needs “painful” economic reforms to cut back on its massive debt. Addressing the World Government Summit in Dubai, he said, “I repeat the reforms are painful. It’s like a surgery. When you conduct surgery for a while the patient suffers but that improves. The worst thing that can happen for society is that you keep postponing reforms because of the fear that you would have opposition, the vested interests stand up and you don’t do reforms.”

It is a fact that past governments failed to make structural changes and improve governance but the Pakistan Tehreek-i-Insaf (PTI) government cannot blame them now. Consequences of all blunders, mismanagement and inaction of the past governments lie on the table of the prime minister and he has no option of failure. The situation is not easy to handle. The government is finding it difficult even to foot debt servicing and necessary expenditure and funds for public welfare look impossible at the moment. According to former government spokesman on the economy, Dr. Farrukh Saleem, Pakistan’s foreign reserves stand at US$11 billion in the negative, which means the country has been left with no dollar, despite receiving about $10b from friendly countries.

The government aims to introduce more reforms in the next few months. It means there is no prospect for relief for the people anytime soon and they will continue to suffer in years to come.