Tag: reforms

  • Pakistan, IMF and our economic future

    Pakistan, IMF and our economic future

    Pakistan is looking to resume the IMF’s $6 billion programme to bring in some much-needed foreign exchange. The programme was earlier suspended due to the government’s unwillingness to increase power tariffs and bring in a mini-budget. The negotiations for programme resumption were further delayed due to COVID-19 but IMF came to the government’s rescue with $1.4 billion emergency financing, which helped the country sail through tough times.

    But now we are back to square one, and it’s time to take some hard decisions.

    Reportedly, IMF is expecting Pakistan to significantly increase electricity prices, bring in additional revenue measures and introduce a few legal amendments. Pakistan was expecting an IMF mission in December to negotiate the conditions, but it seems that IMF is expecting some solid prior actions by the government, before it plans a review mission.

    There is no doubt that an electricity price increase is inevitable to reduce the mounting circular debt, and new tax measures are critical to help the government reach the ambitious Rs4.9 trillion revenue target. But the government is worried on two counts: not only will these measures be unpopular and further strengthen the opposition’s narrative around inflation but will also make a dent in government’s efforts to stimulate the economy. The prime minister has already given a nod to the electricity price increase; however, it is not clear if this increase is enough and how soon the government will be able to pass this on to consumers.

    However, irrespective of whether the government ends up taking these unpopular yet necessary measures or if the IMF ends up showing some flexibility, it remains to be seen if we can keep on relying on these ad hoc measures, pushing electricity tariffs up for the paying consumers and squeezing the existing taxpayers to meet the ever-increasing targets.

    Pakistan has availed 21 IMF programmes over the past 60 years; however, these programmes failed to bring in any sustainable improvement in Pakistan’s worsening conditions. Pakistan’s repeated boom-bust episodes are now a characterising feature of its economy, where sprouts of growth are inevitably followed by prolonged slumps.

    All political governments start in the midst of a balance-of-payment crisis, necessitating going for an IMF programme. IMF brings in foreign exchange to avoid a default but also fiscal and monetary tightening, which slows down growth. As soon as the IMF goes away, the country takes no time in coming back to its expansionary fiscal and monetary policies, owing to political reasons and mostly to win the next election. This in turn increases the demand for imports, increasing the trade deficit, and the country is pushed into yet another balance-of-payments crisis and the cycle starts all over again.

    But every time, Pakistan’s economic indicators sink a bit further than the previous episode. It is clear that we are on an unsustainable economic trajectory, but our political shortsightedness prevents us from seeing what’s written on the wall.

    What can break this vicious cycle? The answer is actually not that difficult. What we need is a serious dose of structural reforms, where we expand the tax net, do away with the exemptions enjoyed by powerful lobbies, control power thefts and line losses, stop the bleeding by state-owned enterprises, rationalise the ever-growing subsidies and strengthen and diversify our exports base. But these reforms require paying high political costs and compromising on short-term gains for the longer-term future.

    IMF is also no stranger to these solutions. Almost all recent IMF programmes have stressed these reform areas, but every time they end up being content on short-term corrective measures rather than the so-called structural benchmarks.

    A research paper by Harvard Kennedy School in 2015 highlighted that IMF ironically adopts a serial lending pattern. More than one-fourth of IMF member countries were part of an IMF programme for fifty percent of the duration since they became a member. Another 37 per cent have been on IMF programmes for 40 per cent of the time or more. This makes it quite evident that Pakistan, like many other developing economies, has ended up being addicted to this repeated dose of IMF money, without ever fixing the underlying problems.

    Recent months, however, have shown some positive signs, with the government mulling over restructuring plans for SOEs like Pakistan Steel Mills and PIA, announcing ambitious and futuristic power sector reforms, re-negotiating contracts with Independent Power Producers (IPPs), stimulating export industries, and even taking stock of the massive subsidy stock.

    The market-based exchange rate regime adopted by the government has already put in place an auto-corrective measure, whereby any significant current account imbalance will lead to currency devaluation, making imports expensive, reducing demand and narrowing the trade deficit.  However, the government needs to follow through on its plans and build further on this groundwork.

    These measures will undoubtedly be hard to put in place, but sooner or later someone has to go this road. If the present government pushes through on these reforms, it can help the country break out of this vicious cycle and can create a name for itself in Pakistan’s economic history. If not, we’ll be knocking on IMF’s doors yet again in another 4-5 years, but in a much worse condition.

  • The inconvenient truth about Pakistan’s economy

    Battle of narratives confuses ordinary citizens who are less interested in politics and are more keen to know where the economy is actually heading, what they should expect in terms of growth and whether Pakistan can offer them a prosperous future.

    Economy is the hottest subject these days. Political zealots from opposing sides pick and choose data snippets of their choice, build an argument and relentlessly attack the other party.  On one hand, the Pakistan Tehreek-e-Insaf (PTI) social media machine keeps focusing on massive current account deficit and export decline during Pakistan Muslim League-Nawaz’s (PML-N) tenure, while the PML-N social media warriors rely on abundant ammunition provided by high inflation and slowing down economy.

    This battle of narratives, however, confuses ordinary citizens who are less interested in politics and are more keen to know where the economy is actually heading, what they should expect in terms of growth and whether Pakistan can offer them a prosperous future.

    Let’s first understand the origin of the present economic crisis.

    For years, Pakistan’s foreign exchange inflows — earned through exports, foreign direct investment, remittances and official development assistance — have been lagging behind its forex outflows required to pay for its imports. But this gap increased considerably in recent years, thereby forcing the country to excessively rely on external borrowing. The problem was further compounded by the overvalued exchange rate that was held artificially high during the last government’s term. This overpricing made imports cheaper and exports expensive, further enhancing the trade deficit. As a result, the current account deficit went as high as about $1.5 to 2 billion a month, which became unsustainable. The PTI government sought help from friendly countries like Saudi Arabia and China and managed to get more than $6 billion in loans or deferred payments. But without working on reducing the current account deficit, even this didn’t last long.

    The situation was no better on the fiscal front. Pakistan has been generating far less revenue than what it was spending, leading to huge fiscal deficits, which were again financed through borrowing. The state-owned enterprises kept on draining the exchequer and the circular debt kept on piling up, crippling the government. This unsustainable financial situation compelled Pakistan to knock at the doors of the International Monetary Fund (IMF).

    IMF is considered the lender of last resort and provides a bailout to a country to avoid an economic crisis when no other lender is willing to step in. But in return, it puts down certain conditions for the borrower, to put its house in order. The same happened with Pakistan.

    Pakistan has a resilient economy on the back of its 200+ million-strong population, abundant natural resources and a vibrant private sector. About two-thirds of the Pakistani population is youth, making it the youngest country in South Asia and skilling this workforce can do wonders for the country.

    To immediately curtail the current account deficit, Pakistan had to significantly devalue its exchange rate to bring it in line with its market value. But this sudden devaluation overnight made imports expensive, including petrol, leading to a round of imported inflation. Along with consumer goods, industrial goods and raw materials also became expensive. Many industries such as automotive had to pass this increase on to consumers, putting their products out of reach of many, slowing down the consumer demand for them.

    The government also had to raise prices of gas and electricity to reduce the fiscal deficit, fueling inflation. Mismanagement leading to food supply disruptions, such as wheat and flour crisis, also played its part in further pushing the inflation higher. In anticipation of the inflationary pressure, the government had already increased the interest rates. But these high interest rates, while curbing inflation, made borrowing expensive for the businesses, thus taking a further toll on their growth.

    Factories had to cut down production. Unemployment rose. And the economy started to slow down. It was as if an over-heated engine was suddenly sprayed with a splash of cold water.

    The tight fiscal and monetary policies, which were unavoidable to reign in out of control current account and budget deficits, also brought in inadvertent consequences making life hard for the people. And this is how the government ended up where it is right now. The inflation is still rising, growth is nowhere in sight and the government keeps on mulling over ways to cut corners to meet stringent IMF conditions.

    The dark night of economic hardship will be over soon. But what matters is if we can take some hard decisions during this time, correct the imbalance between our public sector spending and income, develop our export base and pull Pakistan out of its perpetual reliance on foreign and domestic borrowing.

    But all is not doom and gloom. Pakistan has a resilient economy on the back of its 200+ million-strong population, abundant natural resources and a vibrant private sector. About two-thirds of the Pakistani population is youth, making it the youngest country in South Asia and skilling this workforce can do wonders for the country. Not only does the country have 10+ million expats, forming the sixth-largest diaspora in the world, but their remittances have also been growing. Since the year 2000, remittance inflows to Pakistan have grown by 19-20 times in real terms. Moreover, in recent years, China has pumped in billions of dollars, as part of the China-Pakistan Economic Corridor (CPEC), improving Pakistan’s infrastructure and putting it on the Belt Road Initiative (BRI) map. The improved connectivity can yield sizeable trade and investment dividends for Pakistan.

    Given this tremendous economic potential, it is quite likely that as soon as the government will ease out the fiscal and monetary policies, the economy will rebound. But that growth can only be sustained if our trade deficit does not go out of control, our manufacturing sector has the capacity to expand and we can generate enough investments to sustain the growth momentum. And for this to happen, our public sector needs to be more efficient and give more space to the private sector to grow. It also requires that the government should reduce its non-productive expenditure and increase public investments, broaden the tax base and use the tax money effectively to stimulate the economy and stop using state-owned enterprises like Pakistan International Airlines (PIA) and Pakistan Railways (PR) for patronage and instead make them self-sustainable and profitable entities.

    The dark night of economic hardship will be over soon. But what matters is if we can take some hard decisions during this time, correct the imbalance between our public sector spending and income, develop our export base and pull Pakistan out of its perpetual reliance on foreign and domestic borrowing.

  • Buzdar govt ‘softly declines’ to implement PM Imran-approved police reforms

    Buzdar govt ‘softly declines’ to implement PM Imran-approved police reforms

    Chief Minister (CM) Sardar Usman Buzdar-led Punjab government has softly declined to implement the police reforms package that was approved by Prime Minister (PM) Imran Khan ahead of his departure for Saudi Arabia and the United States (US), The News reported.

    According to reports, the Punjab government through the Interior Ministry was recently asked to implement the reforms package, however, the provincial administration has expressed reservations over certain measures approved by the premier “without proper consultation with the stakeholders”.

    The premier has reportedly given a go-ahead to the home departments to “take over control of the police” in Punjab, Khyber Pakhtunkhwa (KP) and Islamabad. Under the new system, the major functions of the police would be performed by the deputy commissioners (DCs) who have been given judicial powers of 22A and 22B besides the authority to inspect police stations.

    While the federal government wanted the implementation of these reforms in Punjab through an ordinance by September 30, the provincial government has assigned a high-level committee to review the reforms package for police and return to centre with its recommended changes.

    The report further said that the committee will be headed by the Punjab law minister and include three provincial ministers, chief secretary, inspector general of police (IGP), an ex-chief secretary and a retired IGP.

    It has been tasked with completing its deliberations within a week.

    “Following a presentation from the interior secretary, the reforms package was given a go-ahead by the PM. While the Punjab law minister was present during the presentation, neither the CM nor the IGP was there,” the report quoted sources as saying.

    COPS UNHAPPY WITH REFORMS:

    Meanwhile, officers of the Police Service of Pakistan as well as Punjab Police are “very upset with the way the reforms package was approved by the premier”.

    Reacting to the reforms, senior officers of Punjab Police held a meeting at the Central Police Office on Wednesday night and threatened that they would resign, Dawn reported.

    The police officers stated categorically that they “would prefer to leave their services rather than allowing the bureaucracy to take over the police department”. They unanimously rejected the new scheme which, they said, was an attempt of the Pakistan Administrative Services (PAS) to bring police under its control.

    Reports quoted an official as saying that the participants of the meeting decided to take up the matter with CM Buzdar and parliamentarians to highlight their reservations.

    Senior policemen authorised the IGP to meet the CM and bring to his knowledge their concerns. They also decided to present “factual situation” regarding the “failure” of the DCs on many fronts.

    Meanwhile, Law Minister Raja Basharat held a meeting with the IGP and other senior police officers who apprised him of their concerns. The law minister assured the IGP and other senior police officers that he would play his role in addressing their legitimate demands by taking these up with the chief minister.