I sympathise with Finance Minister Asad Umar, who has been put in an impossible situation. On the one hand, he is expected to contain fiscal deficit and public debt to put in place economic discipline, while on the other he has to ensure adequate economic growth to create 10 million jobs. He has to manage current account deficit and protect the fast-depleting forex reserves but is also expected to stabilise the plummeting rupee. He knows that he might have to give in to IMF demands and yet has to maintain at least a semblance of pursuing an independent economic policy. And he has to manage all of this with a bureaucracy that is accustomed to managing any economic crisis through more debt rather than reform.
This is the politiconomics of Pakistan, which is getting puzzling by the day, as the PTI is trying to keep a balance between the idealistic promises that it once made and the ugly realities of the real world that it is trying to manage.
The recent round of rupee depreciation and overnight increase of 150 basis points in the interest rate have jolted the market. No one disagrees with the need for these tightening measures but what the people are questioning is pace and politics. Ironically, these measures came the very next day the FM claimed that the balance-of-payments crisis is over, the monthly current account deficit has been halved and the government would not accept unreasonable demands by the IMF. Besides depreciation and hike in the interest rate, gas and electricity tariffs have already been increased while the public-sector spending has been drastically slashed. This exactly was the price we were avoiding to pay and if we have paid it already, what is keeping us from an IMF programme? If these decisions were taken after signing an IMF programme, at least we would have taken them as a bitter pill and would have hoped for some stability going forward.
Moreover, the expectations of the public have been set high right from the outset and are further fuelled by the euphoric claims about completing majority of promises made in the 100-day plan. What I really admire is the government’s effort to restore the sanctity of election manifestos, but the harsh reality is that we might not be able to keep up with many of these promises.
We are heading for a major economic slowdown and it might be hard even to achieve 4% growth in the current year. Such a massive slowdown is likely to result in increased unemployment and will lead to a shrinking tax collection. The stringent measures suggested by the FBR on the real estate sector would dissuade overseas Pakistanis from sending remittances back home while the foreign exchange risks may overshadow investor enthusiasm to invest. And the constraining fiscal space will limit the government’s options to stimulate the economy.
Most importantly, it is unclear that once this tightening phase is over, whether the government would have the appetite for serious structural reforms such as fixing the state-owned enterprises (SOEs), eliminating circular debt, widening the tax net and cutting down government spending. There is a reason why previous governments have shied away from these measures and instead chose to borrow recklessly. All these reforms entail painful decisions with a high political price to pay. While revamping SOEs and cutting government spending would involve layoffs or changing pensions structure, eliminating circular debt and widening the tax net would require taking tough measures that can alienate PTI voters.
There is no easy way out of this complex muddle, but what can help is some immediate clarity about an IMF programme or an alternative approach and timeline and extent of any future tightening measures. We have to realise that more than economics it is politics that is killing us.
Published in The Express Tribune, December 4th, 2018.