Partly due to the recent political impasse, Pakistan faces a balance of payments crisis on a short-term basis. A pause in the International Monetary Fund (IMF) negotiations, the reluctance of friendly countries to oblige an outgoing government through rolling over their deposits in the State Bank of Pakistan (SBP) and the panic buying of dollars during the political uncertainty led to a situation where the State Bank of Pakistan’s (SBP) foreign exchange reserves declined $5 billion in a single month (March 2022) to $11.3 billion on April 1, 2022.
This situation necessitates immediate resumption of talks with the IMF to complete the seventh review to get the stalled $1 billion tranche and pave the way for engagement with other creditors. Let us analyse what is required to resume the engagement with the IMF.
The political uncertainty is one of the reasons the seventh review of the IMF’s ongoing extended fund facility (EFF) remains inconclusive so far. One can argue that the political situation is still quite unpredictable, despite a change of guards on treasury benches.
For instance, one is not sure whether the PDM alliance government would complete its remaining tenure or call (or be compelled to call) early elections. The answer to the above question would determine who would be implementing the IMF deal that the Shahbaz government negotiates now. Depending on how things unfold, there can be three possible scenarios on who would implement the remaining part of the IMF programme: the PDM government (a most likely scenario), a new government formed after early elections, or a caretaker government assigned to hold the next polls.
The mere fact that these scenarios exist on our political landscape is enough to shake the IMF and other development partners’ trust. The IMF suggests serious policy and structural measures that require consistency and complete government ownership. Clarity on the government’s tenure would help meaningful resumption of talks with the IMF.
Shahbaz Sharif’s government’s first and foremost priority should be the right kind of signalling, i.e., to state clearly whether he would continue till August 2023 or call early elections. This would help not only the IMF talks but also the government’s economic policymaking.
For an early election scenario, the new finance minister would prefer not to think beyond four to six months and probably focus on providing short-term relief to the masses without struggling to keep the EFF programme intact. While for a 15-month tenure, pursuing macroeconomic stability would become his main priority.
Besides receiving explicit signalling on the ‘tenure’ of the government, the IMF would like to see the current government taking ownership of some of the policy measures that the outgoing government undertook (and parties in PDM, then in opposition, opposed). These measures include granting autonomy to the SBP, withdrawal of the general sales tax (GST) exemptions, introducing a “weighted average cost of gas formula,” etc.
The IMF would also like the government to roll back some of the relief measures initiated by the PTI government, especially the relief package on energy and amnesty for investment in the industrial sector. Endorsing the policy measures, PDM partners have been opposing while in opposition and rolling back the relief measures of PTI would be challenging for the government and potentially erode its political capital. However, the government has limited options. It should start the ball rolling with the IMF on an immediate basis.
Besides reviving the IMF programme, PM Sharif should also try to secure deposits from friendly countries to build up the SBP reserves. One expects that he would do the needful in his maiden visits to Saudi Arabia and China. The SBP reserves crossing the psychological threshold of $15 billion would place Pakistan in a comfortable position as far as the balance of payments position is concerned.
Along with seeking external support, the government would have to minimise its non-productive expenditures to reduce the fiscal deficit. This would require resisting the temptation to take populist measures. Having said that, the government should spend on one thing: strengthening the existing social safety nets. Targeted subsidies on energy and other commodities and strengthened social safety nets would, to some extent, protect the low- and middle-income earners from the inflationary shock of an increase in prices of petrol, diesel and electricity (withdrawal of PTI government’s relief package).
One is mindful that the incumbent government (like any other government) would want to establish its positive marks on Pakistan’s economic landscape. However, doing so through short-term policies and populist measures would be extremely dangerous for the macroeconomic stability in the medium- to long-term. Let us see what other options and opportunities the PDM government has to take to uplift Pakistan’s economy.
The PML-N government is historically perceived as a business-friendly government. Although the incumbent government is an alliance government and not a PML-N government per-se; however, using its goodwill among the business community, PM Shahbaz has an excellent opportunity to build upon Pakistan’s economic resilience, amid Covid-19.
The government should capitalise on the post-pandemic economic recovery in Pakistan and strengthen some of the steps taken by the previous government for improved ease of doing business and reduced cost of doing business.
It is one of the rare times in Pakistan’s recent political history that the like-minded coalition partners are running the federal government, Punjab government, and the Sindh government.
The PPP-led government in Sindh remained reluctant to own and implement many of the initiatives started by the then PML-N and PTI-led federal governments since 2013.
“Sehat-Insaf Card,” “Kisan Card”, Agricultural Transformation Plan, etc, are some of the current federal initiatives that could not be started in Sindh. The PDM alliance government should ensure to take the Sindh government along, especially for social sector development projects. This opportunity can also be used for tax harmonisation across the federation. Likewise, this is the appropriate time to work on the much-delayed “National Finance Commission (NFC)” award. It would be comparatively easy for the new government to forge consensus among the provinces around NFC.
Economic issues facing PPP, PML-N, and PTI governments (2008 till now) were almost similar and so are their intended solutions. For instance, all the three tried to achieve macroeconomic stability through their respective IMF programmes. They attempted to reduce the losses in the energy sector and state-owned enterprises. They attempted to document the economy by reforming the general sales tax and the list goes on.
Interestingly, the major reasons none of the three governments could address Pakistan’s economic issues are also common. All three, in opposition, strongly opposed the initiatives that they tried to take, while in power.
All the major political parties naturally aspire to form a government after the next elections. Therefore, it is in everyone’s interest not to politicise the measures intended to address Pakistan’s economic woes. A consensus on a minimalistic economic agenda is the way forward, amid the current political turmoil.
(Dr Abid Qaiyum Suleri heads Sustainable Development Policy Institute)
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