Rashid A Mughal
PAKISTAN economy continues to be in doldrums and with Covid-19 creating havoc with the global economies, rich or poor, developed or under-developed. Pakistan is no exception. Mounting debt crisis, falling exports, un-checked and spiralling government expenditure, absence of effective price mechanism to control every-day food items are not only ringing alarm bells but have put the country on a rough and bumpy road. Common man is the hardest hit and getting disenchanted with the PTI slogans. The situation needs extra urgent measures and policies which should be visible and workable to correct the course. The present scenario is giving ample fodder to opposition to exploit the situation. Hence the urgency to act rather than talk only.
Dwindling foreign exchange reserves, low exports, high inflation, growing fiscal deficit and current account deficit – are nothing new, and once again, the country finds itself knocking on the doors of the IMF. While the exact amount of this package has not been determined, Pakistan already owes IMF billions from previous programs. Indeed, 30.7% of Pakistan’s govt expenditure is earmarked for debt servicing, which cannot be supported by its decreasing revenues. Already on the Financial Action Task Force’s (FATF) grey list, and with the current PTI government enjoying internal institutional consensus on the national agenda, Pakistan must focus its attention on resolving its economic woes before it finds itself on the shores of bankruptcy. Presently Pakistan finds itself facing a dire macroeconomic crisis. The previous governments focused more on import-led growth strategy to finance large scale projects under CPEC.
By the end of June 2018, the gross public debt of Pakistan reached USD $179.8 billion, showing an increase of $25.2 billion within a year. More than half of this increase in gross public debt was due to an increase in public external debt, which grew by 30.1%. In 2018, the depreciation of the Pakistani rupee against the U.S. dollar alone was responsible for an excessive USD $7.9 billion increase in public external debt. Despite the massive depreciation in the rupee, Pakistani exports have remained almost the same. Meanwhile, the government’s external debt has also increased from USD $64.1 billion in June 2018 to USD $65.8 billion in January 2019. The inflation rate is now touching 9.4%, which is a record high over the last five years mostly due to rupee depreciation and rising energy prices. In addition, increased defense spending and its ongoing fight against extremism only further burden the economy. Along with a depreciating rupee that has made imports costlier, low foreign investment due to Pakistan’s security and political challenges has also severely hit its foreign exchange reserves. Despite rising deficits, Pakistan’s tax revenue was only 13% of its GDP in 2018. During the current fiscal year, the country has seen a decline in its revenues while expenditure has increased, resulting in a half-year fiscal deficit of 2.7% of GDP, the highest since 2010-11. According to the State Bank of Pakistan, the sharp decline in revenue can be attributed to a fall in development spending, reductions in income and corporate taxes, and taxes on petroleum products, as announced by the previous PML-N government.
Similarly, the previous government failed to make any significant progress in enhancing exports: in fact, Pakistan’s total exports fell in real terms during the PML-N’s tenure. In its recent report “Pakistan @100: Shaping the Future,” the World Bank held weak governance responsible for the fiscal deficit. Pakistan’s poorly regulated financial system facilitates tax evasion which contributes significantly to the growth of the fiscal deficit. Having inherited this economic crisis from the previous government, the PTI government, has an enormous task of steering Pakistan’s struggling economy out of a macroeconomic crisis by fostering economic development. Little progress has been made on reducing inflation because of the massive increase in SBP financing of the mounting budget deficit as government has failed to get the tax reforms moving or contain spending. Domestic debt (including energy related financing overhang) has increased to dangerous levels. With little progress on a structural strengthening of external accounts, any recovery of growth or increase in global oil prices and interest rates are likely to widen the current account deficit and adversely affect external debt sustainability.
Assigning multiple and conflicting objectives to specific policy instruments is counterproductive. In particular, monetary policy must not be directed at more than one primary objective. Successful macroeconomic reforms call for an independent Central Bank with primary focus on containing inflation, preferably, through inflation targeting. The ensuing monetary policy anchoring inflation has a supportive effect on fiscal policy, discourages debt accumulation, ensures exchange rate stability and promotes market confidence. However, successful inflation targeting itself calls for fiscal restraint and restraint on government borrowing. Successful implementation of a reform program calls for explicit national consensus and full political support.
Unstinting and sustained support at the highest level of the government for politically difficult, but necessary, reforms is critical. The unquantifiable factors influencing implementation of reforms – are quite important. Ideally, these should involve a combination of external – creditors – and domestic actors – technocratic reformers – to provide incentives sufficient to spur and sustain the reform process. Where these factors do not appear to exist, there is a need to “create” them so as to inject incentives for reform.
The design of the current adjustment program has evolved over the past two years or so. Although still not fully integrated with a national medium term reform strategy which should stress increased export-oriented investment financed primarily by higher domestic savings, the program, if fully implemented, has the potential to break the vicious circle and allow reforms to take hold. It appropriately aims at tightening fiscal policy so that monetary policy can cope with inflation, put revenue growth on a sustainable path, stabilize the exchange rate and reduce structural rigidities, particularly in the energy sector, so that growth could pick up. However, the program has so far not had the intended effect because of poor implementation owing largely to weak governance.
— The writer is former DG (Emigration) and consultant ILO, IOM.
