Curtain-raiser: Endgame for the economy?

Leading advocacy group set to present ‘minimum national economic agenda’ for consideration before key politicians.

ISLAMABAD:

As Pakistan hurtles towards an economic disaster, a leading advocacy group will today step up to the plate in what many see as a high stakes gambit to try and break the political gridlock that has tied the country’s economy down. Today the Pakistan Business Council (PBC) presents what it calls a “minimum national economic agenda” before a gathering of political leaders from the five major parties.

“The agenda covers five broad areas: macroeconomic stability, energy, education, regional trade and social protection” said Asad Umar, President of the PBC, while talking to The Express Tribune. “We believe there is a dire and urgent need to take some tough decisions on economic reform so that the aspirations of the citizens of Pakistan and all key stakeholders can be met.”

The sentiment is nice, but the realities are not.

According to a recent analysis of Pakistan’s political and economic predicament submitted to the White House, the country’s economic agenda has been stuck in “political gridlock.” And on April 7, the International Monetary Fund (IMF), the country’s leading creditor, warned in a strongly worded note that Pakistan’s reform programme, after some progress in 2008 and 2009, has been “retarded or reversed in 2010 and 2011.”

With growth stalling, power shortages growing and the finance team of the government in apparent paralysis, Pakistan’s economic management appears adrift. The situation is becoming increasingly dangerous as storm clouds once again gather around the global economy, with a sovereign credit crisis lurking in Europe and the United States, and oil prices again on the march.

But at the heart of Pakistan’s economic difficulties is the growing fiscal deficit.

“The fiscal situation is out of control,” says Dr Hafeez Pasha, Chairman of the Revenue Advisory Council (RAC), speaking about Pakistan, “inflation is persistent, and if oil prices continue rising then all bets are off.”

The government has given its creditors a commitment that it will keep the fiscal deficit at 5.5 per cent of GDP, but few are buying this number. In its programme note on Pakistan, the IMF speaks of “[i]mportant delays in tax and expenditure reform,” and goes on to say that earlier attempts to control spending were “initially successful, but since June 2009, the authorities have exceeded the budget deficit targets under the program, among others, due to large additional subsidies for the electricity sector.” There is little mercy in these words; the IMF is normally so diplomatic in its pronouncements that it takes special training to decode its statements.

But raising revenues and cutting expenditures is easier said than done. Finance Minister Hafeez Shaikh has struggled to advance fiscal reform, although his efforts are perceived by many to be puny and conflicted.

At the heart of Pakistan’s tax reform is the move to introduce a Value Added Tax. And at the heart of expenditure control is cutting electricity subsidies and stemming losses at the public sector enterprises.

The efforts have been vilified in the national conversation and ricocheted off the walls of political indifference like a pinball. The decisions required to bridge the fiscal deficit have proved too difficult for a government that gives the appearance of fighting for its survival on a day to day basis.

“We believe the tough decisions needed today cannot be taken by any single political party,” says Asad Umar, who is mindful of the political realities that are holding economic reform back. “Therefore, the need is for a collective process to take the decisions, to arrive at a minimum common economic agenda, and to own the implementation as well,” he adds.

The stalled reforms have had far reaching effects. Pakistan’s credibility with its creditors has fallen so low that Dr Ehtesham Ahmed, who represented Pakistan on the board of the IMF for three years, says the current program “is dead.” Reportedly, the Managing Director of the IMF even refused to meet with Finance Minister Hafeez Shaikh during his visit to Washington this month.

Moreover, the high level of reserves is making key policymakers complacent towards the situation, Dr Ahmed adds. “Most of this money is borrowed and could unwind very quickly,” he says, pointing out that it took less than one year for “record high reserves” to dwindle to near default levels between October 2007 and October 2008.

The stakes are high, and Asad Umar knows this. If this group of powerful industry leaders fails to get the political awakening required to put economic reform back on track, then Pakistan’s slide into an economic abyss could become unstoppable.



Published in The Express Tribune, April 29^th, 2011.