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Saturday May 18 2019

Another IMF bailout, and still no economic roadmap

The PTI government has reached a staff-level agreement with the International Monetary Fund (IMF), under which Pakistan will receive $6 billion over the next three years. While this sum seems less to meet Pakistan’s already maturing debt repayments, however, IMF’s endorsement for Pakistan’s macroeconomic stabilization plan will allow the country to access loans and grants from other lenders including $5 billion from international financial institutions, such as the World Bank Group and Asian Development Bank.

Even after this announcement, the volatility in currency and financial markets remained high. Most analysts believe that more needs to be done for markets to actually start believing that the government’s economic management is competent and has a roadmap which can overtime help economic recovery. For example, the strategy to manage foreign debt which has soared to $90 billion seems missing. Inflows required to retire $9 billion debt in 2019 and $27 billion in the next two years do not seem in sight.

The prospects of driving growth in productive sectors of the economy also remain weak at least in the short term.

The recent estimates by the National Accounts Committee indicate that growth in gross domestic product will fall to 3.3 per cent, which is a sharp decline in comparison to the target which was set at 6.2 per cent. In IMF’s own assessment, Pakistan will continue to face in the short term, ‘lacklustre growth, elevated inflation, high indebtedness, and a weak external position’.

To fix the external account, brakes have already been applied to import inflows through a more flexible exchange rate, higher interest rates as well as a hike in trade taxes seen in the past for select commodities. However, there is a complete lack of clarity on how the government will reduce the gap between its ever-increasing expenditures and low revenues. The IMF has noted that going forward Pakistan will have to show progress on priority areas which include: better management of public enterprises, cost-recovery in the energy sectors and state-owned enterprises, continuing anti-money laundering and combating the financing of terrorism efforts, engage provincial governments to rebalance arrangements under National Financial Commission. All these fiscal side measures could result in higher price levels and passing on costs of technical inefficiencies in the power and gas sector to end consumers.

Only time will tell if the PTI government has the will to burn political capital and earn the wrath of their voters. Already a scare across the business community is being seen as anti-money laundering and accountability drive transforms into harassment of the private sector.

Formulating the forthcoming federal budget will also remain a challenge. It is really not clear how the government will be able to protect social sector spending and also create additional fiscal space for Ehsaas Programme, Karachi development package and assistance programme for erstwhile FATA – to name a few look-good announcements by the Prime Minister. Also, in the aftermath of Pulwama attack and the evolving situation between India and Pakistan, and the recent wave of terrorist attacks inside Pakistan, the law enforcement and security agencies will also be looking towards an increase in their share of the budget pie.

The federal government is not clear on the long term economic roadmap and policies much required to bring about competitiveness, which in turn could deliver an increase in exports and foreign exchange reserves. The government during its initial days was supposed to announce a three-year economic roadmap, 12th Five Year Development Plan, Strategic Trade Policy Framework, Industrial Policy and Small and Medium Enterprise (SME) policy. There is no timeline from the government when the industry players will be able to see these policies rolled out.

Weak communication and messaging with regards to evolving economic situation also need to be blamed for panic seen in the financial and currency markets. Very different stances on the economy are announced by the Prime Minister, Ministry of Finance, Central Bank and the Federal Board of Revenue. The need for a spokesperson on the economy remains. Also, teams within the economic ministries and related institutions are missing. The lack of experienced and credible macroeconomists in Planning Commission, Ministries of Finance and Commerce and FBR makes the task of even defending the decent economic measures very difficult. No wonder somebody advised the Prime Minister to himself hold a negotiation meeting with money changers and their association.

The future will bring a painful economic adjustment for all Pakistanis. For the PTI government to effectively sell the IMF programme to their voters and people of Pakistan, a better narrative will have to be crafted where citizens understand that structural reforms in the tax regime, power and gas sectors and public sector enterprises were long overdue. Pakistan should have undertaken these even without the IMF’s insistence.

And, it is only after we have undertaken reforms in the above-mentioned areas, can one expect more competitive markets, reduced cost of doing business, and a rationalized regulatory burden on Pakistani enterprises which over time could enable stronger economic growth and exports of goods and services.

Dr Ahmed is an economist and author of ‘Pakistan’s Agenda for Economic Reforms’ published by the Oxford University Press. He tweets @vaqarahmed

Note: The views expressed are those of the author, and do not necessarily reflect the official policy or position of Geo News or the Jang Group.