The accountability drive has put pressure on mainstream political parties temporarily, but a political government has to compromise in the medium term. On the economic front, the government is under immense pressure to deal with the falling foreign exchange reserves.
To surmount that pressure, the government is able to fetch $6 billion from the friendly countries. Considering a whopping $22-25 billion gross external requirement of the country, this amount is small. However, this provides a slight cushion to the government to delay the International Monetary Fund (IMF) bailout package.
No doubt, such bailout packages require harsh fiscal and monetary adjustments on the part of the government which has become a challenge for the new Pakistan Tehreek-e-Insaf (PTI) administration.
The government has already fulfilled certain preconditions to attain the IMF package. It has brought a mini-budget to rein in the fiscal deficit. The budget contains certain upward adjustments in electricity and gas tariffs, taxes and much-touted austerity measures.
If history is any guide, the lesson of history is that austerity is a failed experiment which could not achieve desired objectives across the world.
In sync with the fiscal adjustments, the SBP has jacked up the discount rate in quick successions. The impact of this adjustment will start to come with a lag in the form of slowdown in the real economy.
The higher discount rate normally creates difficulties for the existing leveraged businesses. The businesses which don’t have the necessary cushion become bankrupt. This, in turn, increases the non-performing loans (NPLs). This ultimately leads to a decline in revenue receipts for the government.
This kind of fiscal and monetary adjustment is not new for Pakistan’s economy. Successive governments did follow the conditionality imposed by the IMF programme. Usually, it is difficult for a political government to carry on with this kind of adjustments for an extended period of time since business lobbies start to ask for compensations.
Since Pakistan’s economy is oil-dependent to a large extent, the international crude oil prices have a great impact on it. If a government is under the IMF programme and crude oil prices increase, the government will face immense political pressure to negotiate the economic situation.
Fortuitously, the international crude oil prices have dropped which is also baneful for this political government. The low oil prices will help in reducing the merchandise import bill.
The signs of economic slowdown have started to appear in the economy. The index of large-scale manufacturing has recorded a slowdown. The import growth has slowed down to around 3% in the first five months of FY19 owing to large-scale depreciation of the rupee and a few administrative measures taken by the government.
Similarly, the consumption of oil has gone down in the economy. The current account deficit has started to shrink and is around 4.5% of gross domestic product (GDP) in the current financial year. The economy will further slow down as the lag effects will take root.
The impact of higher discount rate and low development expenditure would have a negative impact on the real economy.
In a nutshell, the government is trying to strike a deal with the IMF where the lender may ask for harsh fiscal and monetary adjustment. The real challenge for the current administration is to negotiate the emerging economic situation where finding decent jobs for university graduates would be the key.
Now, the readers should decide whether the foremost issue faced by the Pakistanis is corruption or not.
The writer is the Assistant Professor of Economics at SDSB, Lahore University of Management Sciences (LUMS)
Published in The Express Tribune, December 31st, 2018.
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