Caretaking the economy

Published: April 12, 2013

When in power, politicians keep grumbling that foreign affairs and national security for them are no-go areas of policy. Economy is, however, largely their domain. Out of power, they wish for caretakers to clean it up and take all the hard decisions. This undying timidity has been the main source of the structural deformities characterising our economy. By not choosing an economist as caretaker prime minister, the Election Commission of Pakistan spoiled the game. And by preventing an economist from becoming caretaker finance minister, the non-economist governor of the State Bank of Pakistan (SBP) ensured, unwittingly, that the caretakers would focus on elections rather than attempt an economic miracle in 60 days. To be sustained over a long period, economic reform must be thought up, legislated and implemented by elected representatives themselves. Were it a matter of technocratic efficiency, the work done by the caretaker regime of Moin Qureshi would not have been rolled back by successive regimes.

The issue at hand is not so much a home-grown package of reform, but when the deteriorating state of the economy will force recourse to the international lender of the last resort, the International Monetary Fund (IMF), which, in return, will demand a whole set of prior actions that the politicians failed to take. The script is a rehash of previous transitions: high external debt, rising debt servicing, depleting foreign exchange reserves and the spectre of a run on the rupee. Traditionally, the local lender of the last resort, the SBP, is the keenest member of the economic team for an IMF deal. It seems the present governor is departing from the script. With reserves of $7.1 billion at the SBP and another five billion dollars with commercial banks, he feels he can pull through. The amount covers two months’ imports and is enough to pay the IMF and other dues by the end of June. Imports are contracting as a result of low growth. Remittances keep on springing a surprise and the dip since December is to be overcome by a new initiative exempting transfer charges. The current account deficit between July 2012 and February 2013 was a manageable $700 million. Inflation was down to eight per cent during July 2012 and March 2013 and the dollar at Rs98.43 is still away from the dreaded parity of Rs100 for a dollar. In the second quarter of the current year, external debt and liabilities were 27.9 per cent of the gross domestic product (GDP), lower than 29 per cent of the GDP in the comparable quarter last year. Total public debt at 61.2 per cent of the GDP breached the legal limit of 60 per cent, but is far lower than the public debts of Greece, Italy, Spain and Cyprus. Pakistan is meeting her official obligations, though some sovereign guarantees have been invoked. The stock exchange and the currency market are not sending any warning signals. Credit to the private sector, especially fixed investment, is up.

The problem is on the side of revenue and expenditure, with a likely fiscal deficit of eight to nine per cent. A caretaker government can tighten expenditure, but the Finance Division is shifting the blame to the Federal Board of Revenue, where confusion is the order of the day. In any case, tax reform is better left to elected representatives. As for the IMF, it is unlikely to risk entering into an arrangement that the next government may not buy. Its next mission is mainly expected to discuss the results of its latest study on energy subsidies. By releasing Rs20 billion to subsidise the power sector this week, the caretaker prime minister has said thanks, but no thanks.

Published in The Express Tribune, April 12th, 2013.

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