Pakistan’s economy: False comfort

Published: February 9, 2011
The writer has served in the Planning Commission and the IMF

The writer has served in the Planning Commission and the IMF

It seems that one reason why Pakistani authorities seem so glib and nonchalant about reviving financial relations with the IMF (and other external donors) is the false comfort that is being derived from a balance of payments position that was in surplus in December 2010 and the rising level of foreign exchange reserves, which now provide a reserve cover equivalent to about five months of projected imports. Experience teaches, however, that a seemingly comfortable cushion of reserves can vanish with astonishing speed. Global prices for food and oil are beginning to surge, reminding us of Pakistan’s last balance of payments crisis in 2008. With no agreement on a pass-through mechanism for oil prices in Pakistan and oil prices in world markets headed higher, Pakistan’s fiscal deficit and import bill are set to soar, the former because of oil subsidies and the latter due to the rising unit price of oil. It is true that exports and workers’ remittances have performed exceptionally well so far and reimbursements from the Coalition Support Fund have also helped shore up the external position. However, it is not clear whether these favourable developments will be sustained in the remaining five months of 2010-11 and beyond, and/or whether they will be overwhelmed by adverse developments on the fiscal and import front. Should the latter transpire, we could see a repeat of the economic cataclysm experienced in 2008.

A small IMF mission has come and gone. News reports say the mission failed to persuade our worthy representatives on the urgent need for fiscal reforms. The mission members met with the prime minister and he informed them that the government was following its reform agenda. One wonders who wrote that brief because it seems that the government has decided to do nothing until the budget for 2011-12. Meanwhile, as the media reports it, the IMF has demanded additional measures, including the removal of exemptions and concessions, which have been doled out to the powerful and well-connected over the years. Removing these exemptions, variously estimated to cause a revenue loss of approximately Rs150-200 billion does not require approval of parliament and can be done through a notification. In any event, this is not an additional demand of the IMF; these are the same exemptions which were to be removed as part of the RGST and, to some observers, was the genesis of the opposition to the RGST since it included, removing the tax exemption on agriculture inputs.

Even if this were to happen, it is unlikely that the IMF staff would recommend to the body’s executive board that the next tranche of the stand-by arrangement be released. The board would want to see a more comprehensive and well-articulated set of reforms not only on the fiscal side but also with respect to public enterprises, the power sector, improving governance and embarking on a clear path to resolving the interlocking problem of circular debt. A piecemeal approach will simply not fly.

This recurring pattern of ‘start-stop’ adjustment, which has sadly been the hallmark of our relations with the IMF grievously hurts the economy. Not only does it cause a loss of reform momentum, it dissipates any benefits that reforms may have conferred. The government loses credibility and market confidence is diminished invariably, resulting in a downgrade of our debt, as has happened recently. This downgrade elevates country risk which manifests itself in higher spreads. Just recently, plans for the Oil and Gas Development Corporation to float a bond in the international market have been put on hold in light of widening spreads. Confidence, once lost, is painfully difficult to regain.

While one may have reservations about whether it is apt to describe the economy as being in ‘crisis’ at present, as most economic analysts suggest, a full-blown crisis may well be not too far down the road, unless we can find resources from somewhere to finance our sharply rising budget deficit and imports. Given the improbability of that happening, another economic crisis marked by stagflation and rising poverty levels would be the horrible price the Pakistani people will have to pay because the government is unconvincing, bewildered and stupefied.

Published in The Express Tribune, February 10th, 2011.

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Reader Comments (15)

  • Nadir El-Edroos
    Feb 10, 2011 - 2:03AM

    I fail to see how we still cant declare that our economy has tipped over the brink. After two years of brutal cuts in the development expenditure we are just barely making ends meet, and that not because of anything we have done ourselves, but due to, as you mention foreign support and increased remittances. A state and an economy that fails to meet the basic needs of its citizenry has failed. Not only has it failed to provide basic services such as education and healthcare, but repeatedly cutting development expenses limits the opportunities available to individuals to improve their livelihood. Recommend

  • Silent Spectator
    Feb 10, 2011 - 2:51AM

    Excellent piece. The Government of Pakistan is clearly in a sense of denial unwilling to admit the inevitability of a looming financial crisis. When pressed upon by organizations such as the IMF and World Bank and to appease them, the government takes a few short-term steps and stops. Then on the pretext of public resentment, it reverses those steps. This is done more to appease the coalition partners than anything else and to hold on to power. I fail to understand the government’s vision and stand on economic issues. On one hand it preaches austerity and reduces the cabinet size. On the other hand, it approves a multi-billion dollar plan to construct palatial lodges for the fat cats. Am I the only one who sees this disconnect or am I missing something? It’s time that these so-called leaders put on their thinking caps, become sincere to the masses, and work on improving the economy. Continued dependence on foreign aid and lack of fiscal responsibility will eventually lead to the economic demise of Pakistan. Recommend

  • Cautious
    Feb 10, 2011 - 9:07AM

    Pakistan seems to go out of it’s way to alienate it’s primary economic sponsor – the USA. I wonder what will happen when the USA pulls the plug? I suspect that when the USA pulls the plug it will use it’s influence to insure that IMF money dries up. Maybe Pakistan has another ally with deep pockets in the wings – fat chance on that.Recommend

  • Ahmed
    Feb 10, 2011 - 9:59AM

    Good analysis but misses the elephant in the room. We got the atom bombs (also locally called “aitum bumbs”) and enough bearded terrorists to populate the rest of the world (as a bonus, a guy called osama too)!! It would be too costly for the world to let Pakistan fail economically or politically, even if we are in complete shambles. Yes!! We have them where it hurts! A true masterpiece indeed and a stroke desi genius!!


    P.S: If you don’t believe me think about why the US government rescued all the big banks with hard-earned tax payer money when the banks went totally broke. Too dangerous for the world economy to let them fail. Same logic here.Recommend

  • Salman
    Feb 10, 2011 - 10:44AM

    The problem is lack of competent ppl in the Govt hierarchy of managing financial mattersRecommend

  • bvindh
    Feb 10, 2011 - 12:46PM

    Does anybody else think that Meekal Ahmed looks a lot like Ratan Tata?!Recommend

  • Feb 10, 2011 - 1:38PM

    @bvindh yes he is resemblence with him.Recommend

  • Tony Singh
    Feb 10, 2011 - 3:10PM

    What? Economy in shambles? Really? Pakistan just tested Haft 7 missile, Hafeez Saeed talks of nuclear war with India. Don’t spoil the party friend. We will blackmail the world into bailing us out.Recommend

  • Saeed Islahi
    Feb 10, 2011 - 4:42PM

    We are used to see a jungle for a tree.There are three spurious claims in the Government sponsored economic bravados:
    First,a record level of foreign exchange reserves around $ 17 billions.This is due to IMF loans and Rupee sale for US dollar and some overdue US payments on account of Afgan military support services.Otherwise, trade and budget deficits are too high and would bleed reseves to a perilious death.Compare this to Indian reserves in excess of $300 billion.
    Second, remittances of expatriate Pakistanis are record high to levels in excess of $10 billions.This is due to high costs of living of their families resident in Pakistan.This may not last if inflation rockets to levels where without compensating depreciation in Rupee parity.This being most likely senario in future,without substantial decline in its parity,remittances’ flow to Pakistan would be via Hundi and thus this valuable source would steeply decline.
    Third,only substantial economic growth can generate export otherwise it would be overwhemed by risnig tide of imports, thus, widening Pakistan’s rade deficit and putting Rupee into a worthless downward spin to which its perpitious journey has been in progress over last three decades.Recommend

  • Ali
    Feb 10, 2011 - 7:06PM

    That’s why democracy in Pakistan does not work. It allows tha massively powerful feudal elite, who have very little/no interest in the masses and not an ounce of human decency to carry on bank rupting the country while they personally benefit.
    The national assembly is made up of feudal elites. The PPP was founded on a policy of socialism, however it has become a party of large land owners who practice a policy of economic apartheid and transformed the country into one of serfdom and lordships. The PML are just as bad.
    Democray is meant to be a system that makes the best decision for the masses, however our version does the exact opposite.
    The quicker the economic aid is pulled the better. Then things will have to change. We can fianlly kiss goodbye to this cabal of feudal elites and put in place a system whose primary aim is to imporve the lot of the common man.Recommend

  • Musthaq Ahmed
    Feb 10, 2011 - 7:19PM

    Pakistani economy shuns markets and lives by toil. US has little reason to complain if only Pakistan manages its external payments. The managers at Islamabad are not votaries of abstinence and renunciation by any measure. They have to look around for external credit some where some time. How will they steer the political ship? This state of stupefaction explains fragmented authority in the country.Recommend

  • Aamir+Ali
    Feb 10, 2011 - 9:36PM

    I thought this was all Musharraf’s fault? Now with democratic govt in power for 3 years the economy is still in shambles ?Recommend

  • ahmed
    Feb 11, 2011 - 7:33AM

    OR, the other way round.
    RATAN TATA looks like Meekal Ahmed.

    I did notice the “double” in the snap shot.

    Did you notice the similarity between Obama and his ” double ” from Indonesia ,recently.

    How do we account for such phenomena ?


  • ahmed
    Feb 11, 2011 - 7:38AM

    Ahmed, this is ahmed41.

    The long & the short of this situation is that the COMMON MAN is doomed.
    INFLATION always hits the poorest section in the stomach.

    Thank your God that you are not a pavement dweller.


  • bvindh
    Feb 14, 2011 - 2:03PM


    “RATAN TATA looks like Meekal Ahmed.”

    -I believe it being the other way round since Ratan Tata was certainly born first. It’s more logical anyway(not that it’s important)

    But, I do want to point out certain trait of Pakistanis I have noticed.
    Once I casually commented that Wasim Akram’s bowling action looked similar to that of Malcolm Marshall’s. And a Pakistani promptly pointed out that in fact Marshall’s action was similar to that of Wasim’s and not the other-way around!!(Wasim himself said that he was inspired by Marshall. In fact Wasim’s method of swinging from wrist, rather than by change of action was adopted from Marshall)

    Behind all the loud show of bravado, I think Pakistanis are trying hard to compensate for a sense of insecurity.Recommend

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