Economy 2020: best and worst cases
Danish Nobel Laureate (in Physics) Niels Bohr once said: “Prediction is very difficult, especially about the future”. Well, he never said the same about hopes and dreams, although these two have the same relationship with the future as predictions.
Hopes and dreams are premised on factors found or missing in the past and the present. These factors can be divided into ‘trends’ and ‘game-changers’. The former are verifiably present around us, whereas the latter are natural or human-made circumstances which may determine whether trends lead to positive change or produce negative outcomes. In the same vein, the hopes and dreams about Pakistan’s economy in 2020 may be assessed through current trends and game-changers.
Let us look at the major economic trends in 2019. The first is the government’s resolve to successfully conclude the IMF programme. The government is trying to increase revenue and reduce expenditures for fiscal consolidation. It is passing on the cost of energy to consumers to curtail the energy circular debt. It is discouraging imports to improve the trade imbalance. It is not artificially supporting the exchange rate and is using monetary policy (interest rates) not only to contain inflation but to attract hot money for shoring up foreign direct reserves.
Second, the focus of economic policymaking and implementation is to achieve macroeconomic stability, at times, at the cost of microeconomic stability (economic stability of the masses). Third, the government is working towards documentation of the economy, not only to help enhance the tax base, but also to avoid the FATF blacklist.
Fourth, Prime Minister Khan is quite keen to do something for the poorest among the poor. He has initiated different social protection measures under the Ehsaas Program. Fifth, economic diplomacy is taking precedence over conventional diplomatic relations. In the rapidly emerging multipolar world, the government is quite clear on siding with those who have and can help in times of economic need. Sixth, the government is mindful of the role of digital technology in boosting Pakistan’s economy.
Seventh, reducing the political temperature does not seem to be a priority for the government. Eighth, the government is not keen on perception building and expectation management around its economic policies.
The ninth and the last trend on my list is demographic: 66 percent of our population comprises youth between the ages of 15 and 30. Despite increased inequalities they are less poor, less food insecure, have improved access to water, health, education, and information; and are more urbanized and empowered as compared to their peers three decades ago.
Each of the above mentioned ‘trends’ can either be a boon or a bane for Pakistan’s economy in 2020 depending on how the ‘game-changers’ impact them. Some of the game-changers include – in no particular order – tone and tenor of the IMF; outcome of the FATF review; geostrategic developments; violent conflict between India and Pakistan; energy prices in the international market; frequency and extent of human-made and natural disasters; use of technology; governance; and mutual respect and co-existence among different pillars of state. The latter two are internal game-changers, whereas all others are external in nature.
Different combinations of the abovementioned trends and game-changers lead to three possible scenarios: business as usual, worst-case scenario and best-case scenario. We are familiar with business as usual (economic performance of 2019) so let us focus on worst- and best-case scenarios.
Take the case of the IMF. Pakistan’s commitments to the IMF in the current programme may be summarized as tax revenue-based fiscal consolidation; greater coordination with provinces for structural economic reforms; ensuring autonomy of regulators including the SBP, Ogra and Nepra; and protecting social and development spending. How far we fulfilled these commitments would be measured against pre-agreed quantitative and indicative targets.
In the best-case scenario, we will fulfil all the commitments (including social and development spending) and continue to get financial assistance not only from the IMF and other multilateral lenders, but also attract FDI through improved credit rating. This may also give additional fiscal cushion to the government for increased social development spending and improving microeconomic stability. In the second best-case scenario, we would partially fulfil our commitments but manage to get waivers from the IMF through the support of Saudi Arabia and the US. In this case, the IMF would not ask for ‘do-more’, and there would be no additional burden on masses.
The worst-case scenario would be missing fiscal consolidation targets in the next review, which would compel Hafeez Sheikh to curtail expenses and impose new taxes or remove major tax exemptions either through or without a mini-budget.
The best-case scenario for Pakistan with the FATF would be to graduate to the white list by removing any deficiencies and lacunas in its financial policies and procedures which could be misused for money laundering and terrorism financing. Partial compliance of FATF requirements and staying in the grey list would be business as usual. In the worst case scenario, we would lose the support of Malaysia and Turkey, and struggle to find other member countries beside China which could save us from getting blacklisted. This scenario would also lead to the premature termination of the IMF programme.
In case of geostrategic developments, the best-case scenario for Pakistan would be where the tension in the Gulf, Afghanistan, between the US and China, and between the US and Iran gets deescalated. The second-best situation would be where Pakistan could maintain equally good relations with different disputing parties in the region. Escalation of tensions in the Gulf after the assassination of Iranian Commander Qassem Soleimani would be a worst-case scenario for us.
Brent crude oil price rose by $2 per barrel to $68 per barrel after the news of Soleimani’s assassination. Any further increase in oil prices would not only make our energy circular debt unmanageable but would also increase the energy-led inflation (and the resultant monetary policy). Escalation of tensions in the Gulf would also negatively affect the livelihoods of millions of Pakistani workers there, which in turn would badly hit our remittances.
The frequency and extent of human-made and natural disasters are also a major determinant of the economic outlook in 2020. Rainfall pattern, timing of the monsoon, severity of summer and winter, and frequency of any other disaster will have a direct correlation with our GDP.
In the best-case scenario, new technologies would positively contribute to individual empowerment, social and demographic mobility, diffusion of power, and management of natural resources like water. However, in the worst-case scenario, they may lead to atomization of power, making it impossible to understand and locate the sources of trouble generated. In this scenario, fake news, cyber bullying and intrusion into personal privacies may also turn unmanageable.
That brings us to internal game-changers – governance and a decent working relationship among the different pillars of state. One can go on and on about the impact of various game-changers, but ultimately these impacts are shaped by the policies and processes we adopt – in other words, facets of governance. On the other hand, the relationship among the different pillars of state has a major influence on quality of governance.
Avoiding the worst-case scenario on the economic front and doing better this year is the common hope and dream of 220 million Pakistanis. The choice lies with our decision-makers. They may not have control over many of the trends and external game-changers. However, they can and should undertake policy adjustment to improve governance and working relations among different pillars of state. Such policy adjustment in anticipation of the worst-case scenario is one of the ways to perform better than last year.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.