Where is the economic driver?

Economic, political fortunes swinging at unprecedented pace that requires bold calls

KARACHI:

Clock is ticking, and ticking fast. Pakistan’s oscillating economic and political fortunes – no less than a roller-coaster ride – are swinging again at an unprecedented pace for even the country’s standards.

The melodrama in the last six weeks is disappointing, feeding uncertainty and making a mockery of the system. Yes, the political change(s) via general elections, military takeovers and vote of no-confidence creates uncertainty.

However, the current dilemma is that the incumbent experienced political parties do not have a long enough mandate. That is a challenge.

Immediately after the previous government was ousted, financial markets rejoiced. With Pakistani rupee strengthening and stock market rebounding sharply (after Miftah Ismail’s “tip”), investors, businesses and common man observed a semblance of it, or rather hoped for one.

Nonetheless, there has been a slide afterwards as fixed-income yields have gone north of 15%, the rupee is heading towards double century and the stock market has nosedived. This can surely end but requires bold calls.

Let’s establish facts first. Pakistan is a price taker in global commodity markets and no politician – despite his wish list and political manifesto – can operate disconnected to market prices.

The rising inflation in Pakistan, barring administrative failures and the impact of depreciating local currency, is a global phenomenon. The incumbents now – the then opposition leaders – made the “Mehangai Mukao” march revolve around the same lyrics. However, it’s time to face the music yet again.

Central banks ploughed helicopter money globally after Covid at ultra-low interest rates, which has reflated the asset class across the board. From demand rebound, supply shocks, China’s lockdown to Russia-Ukraine war, commodity prices are skyrocketing to decades-high levels.

Hence, the PTI policymakers took a “bet” while freezing petrol and diesel prices for a few months. Since then, the refinery margins (read: difference between crude oil and petrol/ diesel prices) have remained astronomical. No, no one saw it coming.

Hence, the current policymakers are in a quandary. Fuel prices had to be adjusted upwards but little did they know that the subsidy is rising fortnightly by alarming, unsustainable and material levels. This has to be reversed.

It’s not IMF’s demand, it’s rational economics and need of the hour. Almost a billion dollars have been squandered, which could have been utilised to develop socio-economic welfare projects. But why wasn’t it reversed then?

The current government is uncertain about the timing of next elections. If fuel prices are reversed and the tsunami of inflation hits the masses in one go, who would be blamed?

Will PTI be blamed for keeping prices low amid rising refinery margins? They would easily disassociate and blame that the “conspiracy-led political setup” is incapable.

Will PML-N get the brunt of the impact and lose political capital after such a tough decision? Why would they want to if we’re heading for elections in 9 to 15 months.

Lastly, PPP remains in a sweet spot as the economic and financial matters are being handled by the PML-N team. Hence, no one really wants to own a car heading towards a dead end.

A homeland for 220 million people shouldn’t be subject to such increased uncertainty at a time when global capital markets are getting expensive or closed.

Our friendly countries – the UAE, Saudi Arabia and China – too have reportedly put (another) economic bailout contingent upon IMF’s plan.

While Miftah’s team has already engaged the IMF and World Bank and shown the intent to remain in the programme, the real decisions would have to be called by the top leadership.

If we are to head for an early election later this year, why would anyone want to increase petrol and diesel prices by Rs50-80 per litre. This will get out of hand and unleash an irreversible wave of inflation.

It’s imperative for the policymakers to bring confidence back into the system. The country shouldn’t appear driverless or ownerless. What’s needed is long-term policies.

Indeed, the only event that can bring medium-term clarity is general elections. If that is what is required, then a caretaker setup should be installed to take the tough, yet needed, economic decisions to bring the economy back on track.

Although the legitimacy of caretakers for IMF discussion could be questioned, it’s decision time. Not doing anything is not an answer.

Pakistan should learn from Sri Lanka’s default and its implications for the fabric of society, which is already getting extremely polarised, charged and on the brink of lawlessness.

Moreover, Turkey’s anti-US stance over the last several years has wreaked havoc on the local economy but it can still navigate due to an already established exportable surplus. Let’s not even compare with the Argentinian peso.

Economy would need to be steered towards the right direction. Policymakers – howsoever temporarily empowered – should immediately take the following steps:

One – reverse petrol and diesel prices to recover the cost and petroleum development levy. Two – imports of luxury items should be further taxed/ banned. Three – IMF’s conditions to bring fiscal discipline be agreed. Four – tax on salaried class shouldn’t be increased as the purchasing power is already going down. Five – discretionary development spending should be cut. Six – forex reserves should be increased back to three months of import cover by arranging financing from the UAE, Saudi Arabia and China. Seven – IMF’s package should be enhanced by $3-4 billion. Eight – taxes on high salaried individual should be increased. Nine – subsidy on exports amid sky-high RLNG prices be removed. Ten – loss-making state-owned entities must be privatised. Eleven – tax on real estate transactions (more than 8 marla/ 500 yards) should be increased. Twelve – taxes on non-filers should be further increased. Thirteen – capital gains tax should be increased on financial institutions benefiting from higher risk-free rates. Fourteen – appoint SBP’s new governor. Fifteen – immediately head towards electoral reforms.

This is for the first time that a new setup is empowered only for a year or so that too in a coalition government of erstwhile arch-rivals – PML-N and PPP.

Nonetheless, tough decisions are to be taken and the policymakers cannot throw in the towel. It’s a nation with strong resilience and proven track record of recovering from the ebb.

After every hardship, there is ease. This too can pass provided politicians stop playing politics and become “caregivers”. Need a good driver on the wheels.

The writer is an investment specialist with keen interest in political economy

 

Published in The Express Tribune, May 16^th, 2022.

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