FeaturedNationalVOLUME 19 ISSUE # 13

Long overdue economic reforms

Pakistan stands at a critical juncture, with long-overdue reforms and privatization efforts facing heightened challenges due to the potential installation of a coalition government after the election. The absence of a clear majority has cast a shadow of uncertainty over the country’s economic trajectory.

The prospects for Pakistan’s long-overdue economic reforms and privatization program appear more challenging in light of the potential formation of a coalition government, given that no political party has secured a clear majority in the general elections. The incoming administration is anticipated to resort to conventional solutions already employed over the past 30 to 40 years. Rather than embarking on politically challenging energy reforms, the government is likely to resort to the simpler measure of raising energy prices, perpetuating elevated inflation rates. While experts predict stability for the Pakistani rupee against the US dollar and other major currencies in the short term, heightened political uncertainty may exert pressure on the stock market and Eurobonds, as the identity of the next government remains unclear.

The Pakistan Muslim League-Nawaz (PML-N) touts an experienced economic team, but the party’s previous finance minister, Ishaq Dar, had a contentious relationship with the International Monetary Fund (IMF). If in power, the PML-N may continue with familiar policies, maintaining control over the rupee-dollar parity and disregarding conditions of a new loan program. Regardless of the governing party, seeking a new IMF program after receiving the last tranche of $1.1 billion under the existing standby arrangement is expected to be a priority, aiming to ensure economic stability, growth, and uninterrupted repayment of foreign debt.

There is a pressing need for Pakistan to implement tax reforms, such as taxing the agriculture and real estate sectors, to boost revenue collection and eliminate dependence on the IMF. However, the challenge lies in taxing the elite, who are always part of the government. Rather than addressing core issues like line losses and energy theft, there may be a tendency to increase electricity and gas prices to tackle the circular debt issue. Businesses already burdened by high levies may continue to be taxed, while the rich remain untouched.

Pakistan cannot afford further political uncertainty, particularly when strong leadership is crucial to navigating the economic crisis. The stock market and Eurobonds will likely experience volatility if political tensions persist. While the Pakistan Peoples Party (PPP) has a history of supporting economic reforms, its Chairman Bilawal Bhutto-Zardari opposes the privatization of state-owned entities. Nonetheless, the privatization program may proceed under the Special Investment Facilitation Council (SIFC) platform.

Inflation is expected to decelerate from February onwards, providing an opportunity for a reduction in the central bank’s policy rate to stimulate business and economic activities. The business community, apprehensive about the split mandate and political uncertainty, anticipates a stable rupee in the next 15 days. With elections concluded, the market anticipates increased bilateral and multilateral financing and the completion of the third IMF review, including the disbursement of a loan tranche after potential challenges.

Former State Bank of Pakistan (SBP) governor Reza Baqir highlighted securing a new IMF loan program and controlling inflation as the primary challenges for the new government. Pakistan faces significant economic challenges, including the sustainability of its debt. Without access to capital markets for new financing through Eurobonds, a key priority for any new government is rebuilding confidence in the economy.

The foremost challenge is establishing a sustainable economic foundation and managing the relationship with the IMF. Key goals include creating a more equitable tax system, bringing privileged classes into the tax net, and avoiding continued pressure on the middle class and salary-earning individuals. Pakistan must explore ways to broaden its tax base.

Pakistan finds itself in the throes of an economic crisis, grappling with depleting foreign currency reserves that face an imminent strain from an impending $1 billion bond payment due in just two months. The urgency intensifies as the country’s $3 billion funding arrangement with the International Monetary Fund (IMF) is set to conclude on April 12. The imminent challenge involves not only securing immediate funding but also addressing the broader spectrum of external financing requirements for 2024, coupled with a hefty external debt burden nearing $100 billion.

The imminent formation of a new government brings with it the imperative to swiftly implement essential measures, particularly in the governance of state-owned enterprises. This urgency stems from the need to complete the final review of the ongoing $3 billion IMF Standby Arrangement, a crucial bridge loan that played a pivotal role in averting a default scenario for the country.

The successful conclusion of this review becomes imperative as it opens the door to securing the last tranche of $1.1 billion before the expiration of the current IMF program in mid-April. This, however, merely marks a transitional phase, as the government must then promptly pivot towards securing a follow-up program to navigate the persistent economic challenges. Among the immediate policy initiatives anticipated from the new government is the negotiation of a fresh IMF Extended Fund Facility program, typically spanning a duration of 3-4 years.

In essence, the upcoming months will witness a critical juncture for Pakistan’s economic trajectory, demanding adept maneuvering to secure immediate financial relief while concurrently laying the groundwork for a more sustained and comprehensive engagement with international financial institutions. The successful negotiation of a new IMF program becomes not just a financial imperative but a strategic move to fortify the country’s economic stability over the coming years.

As Pakistan grapples with the intricacies of forming a government and steering its economy through a pivotal phase, the need for decisive and innovative economic policies is paramount. The path ahead involves addressing longstanding issues such as taxation reforms, energy restructuring, and a careful balance in dealing with international financial institutions. The nation’s economic future hinges on navigating these challenges adeptly, fostering stability, and instilling confidence in both domestic and international stakeholders.