Immediately after being elected as the 23rd Prime Minister of Pakistan, Shehbaz Sharif announced in National Assembly a set of economic policies, which can only be regarded as election year stimulus spending. But these are no usual times, and if at all this becomes an election year – given only around three years and eight months have passed since last election, but also given the high level of political instability, it may very well be – the pandemic is still upon us, even after two years, and the high level of health-related expenditure, and stimulus spending has already put a lot of pressure on fiscal balances.
Shehbaz Sharif himself indicated during his speech in National Assembly that the country was most likely moving towards facing unprecedentedly budgetary and current account deficits in the history of Pakistan, but such realization is not reflected in the economic policies he announced. For instance, no tax policies as such were announced that bring much-needed increase in fiscal space, that targeted those sectors of the economy that did exceedingly well during the pandemic.
Moreover, he did not announce, a well rationalized/targeted subsidy policy, for example, rather than increasing pensions of retired civil/military employees, across the income streams at a uniform rate, lower levels of pension brackets should be increased more, and higher pension brackets relatively less. Hence, since the debt situation is already difficult, it is therefore important that subsidies provided are not poorly designed/targeted. If at all subsidy should be given – and it should be provided, given high inflation and consequences of a recession-causing pandemic, especially on low-income groups – it should be given for instance, on essential food items such as petroleum products, and electricity tariffs for individuals and business sector.
Having said that, it also needs to be pointed out that Shehbaz Sharif did not take account of the impact of pandemic (and related lock-downs, and slow economic activity overall during the pandemic), which has been there for the last two years, and which in all fairness has been dealt with by PTI-led government more than reasonably well, especially in terms of vaccine rollout, lock-down management, and economic recovery mainly in terms of economic growth – the high level of oil prices, which started to rise rather quickly after a couple of months of the start of the pandemic, global commodity supply shock, and more recently the war in Ukraine, which caused commodity supply disruptions, including those of wheat and urea for instance, decade-high food prices of many essential food items, all contributing towards a difficult economic situation, for instance, in terms of manifesting in high component of imported inflation in overall high level of inflation, rising twin deficits, and a likely rise in poverty and inequality.
Moreover, he neither conceded wrong economic policies of PML-N’s previous government, nor did he give any notable credit to the PTI-led government in terms of steering the country out of an imminent default, given a very difficult current account situation that the country faced, along with quite low levels of foreign exchange reserves, and Rupee that was significantly kept artificially appreciated by the PML-N government before them.
In addition, and sadly, the IMF, which enhanced SDR allocation in last August (around $2.75 billion), but did not recognize and reflect the need in the conditionalities of its current programme with Pakistan for a high level of stimulus spending needed by the country during the pandemic, and continued to push for greater pro-cyclical and austerity policies. Shehbaz Sharif in his speech did not acknowledge such difficulties for the PTI-government, and that even then a sizeable stimulus amount was provided by previous government during the early phase of the pandemic.
Hence, while criticising the previous government, he did not objectively reflect why twin deficits had risen so much, along with debt; where the latter among other things also owed its increase to meeting high debt-servicing needs, making significantly large level of welfare/stimulus spending, and health-sector related expenditures during the pandemic, not to mention debt incurred for infrastructural related projects.
This is not to say that the PTI-led government could not have done better in terms of managing macroeconomic and overall growth policies. In fact, a lot of much-needed deep institutional, organizational, and market reform kept pending, including better management of state-owned enterprises. Also, although bottoms-up approach was brought forth, against the trickle-down policy framework, yet neoliberal policies were not rolled back in any significant way, which are the main basis for bottoms-up approach. Indeed, there was a lot of room for improvement, which the writer, among many others, continued to highlight.
At the same time, this is not to say that the debt management policy could not have been much better, especially debt incurred on account of needlessly keeping high interest rates for curbing inflation – given the traditionally at least equal role of fiscal policies in curtailing inflation in developing countries like Pakistan – and in attracting highly fluid portfolio investment for building-up reserves.
The procyclical role of the IMF, and lack of bringing in a meaningful debt restructuring mechanism, and debt relief by rich creditor countries and multilateral institutions during the pandemic also added to the high debt situation and overall economic woes of the country. Here, it also needs to be indicated that in general while rich, advanced countries could recover rather quickly at the back of significantly high stimulus injection and vaccine apartheid, developing countries like Pakistan received little support financially, and low pace of availability of Covid-vaccines. Shehbaz Sharif’s speech would have been more objective in terms of criticism of PTI-government’s policies, if it had properly highlighted the impact of pandemic, among other things, on economy.
While the rich, advanced countries have made huge injections into their economies to safeguard growth, jobs, and welfare spending, developing countries like Pakistan have not been provided any significant debt moratorium/relief both bilaterally and multilaterally, there has been a lack of enhanced allocation of special drawing rights (SDRs), and financially well-off countries have not come true of providing annually $100 billion in climate finance to developing countries. On top of that supply disruptions during the pandemic, and ‘profit-over-people’ mindset of the private sector pushing for unjustifiable profits from the overall global commodity supply shock, and more recently the war in Ukraine, has meant high oil prices, and decade-high food prices. This in turn has put a lot of pressure in terms of imported inflation, and foreign exchange reserves, on countries like Pakistan, which are a net importer of many of these commodities.
Hence, on one hand, meeting rising needs of stimulus and health sector, along with providing subsidy on commodities like oil and electricity, for both individuals and for business activity has already put a lot of government’s own resources, more stimulus policies as being announced by Shehbaz Sharif will likely make current account, and budget deficit — or in other words, twin deficit – very unstainable. This will also likely raise financing needs, and since the debt situation is already very difficult, it may very well lead to fast depletion of foreign exchange reserves, and in making already high level of debt unsustainable, especially due to rising inflation globally has led to increase in interest rates.
Moreover, if the current government intervenes a lot in terms of appreciating the Rupee against the dollar, this will lead to a further draw-down in reserves, and any financing managed through short-term borrowing or through floating bonds, will carry a lot of interest payments, since interest rate both in Pakistan, and globally are already rising, and are at a relatively high level. More importantly, the recent significant 250 basis points rise in policy rate, and its current level at 12.25 per cent is sending a signal to economy, and to the International Monetary Fund (IMF), that aggregate demand is being curtailed to rein in inflation. On the other hand, the election year stimulus package, and possible intervention for currency appreciation will be contrary to the austerity stance of State Bank of Pakistan (SBP) and the IMF; where the latter also requires augmenting further pro-cyclical policies of reducing subsidies, and increasing taxes/tariffs.
Rather than giving a superficial, and poorly designed and targeted stimulus package, mainly in terms of inclusivity and matching policy emphasis with respective level of economic vulnerability, Shehbaz Sharif should look to plan on the lines discussed above, and in addition carry out an active economic diplomacy with rich, advanced countries and with multilateral institutions for greater debt relief, enhanced SDR allocation, and increased release of climate finance to Pakistan. Moreover, there should be taxation policies announced that target greater wealth and income tax on sectors like information technology (IT), and stock exchange that did well during the pandemic. There should also be thought given to emulate foreign currency related cushion as was provided by Turkey in recent months.
Short of this, the currently announced plan will most likely make managing macroeconomic accounts very difficult beyond the very short-term, will be a hard-sell in terms of unlocking IMF programme’s remaining tranches, and will add to debt unsustainability, and will likely lead Pakistan to an even tougher IMF programme. And lack of subsidy on high policy rate, and exchange rate, not to mention the poor targeting of stimulus, will neither uplift growth or jobs, nor make such growth more inclusive, which is an urgent matter in the wake of recession-causing, and inequality-enhancing pandemic. Moreover, the new government should come forth with a meaningful non-neoliberal institutional, organizational, and market reform agenda for making much-needed changes for economic consequences that are long-term, sustainable, and inclusive. Such economic empowerment, in an overall meaningful, mission-oriented, public sector will help improve not only the distributional consequences of growth more broadly, but will also increase political voice, and the overall quality of democracy.
(The writer holds a PhD in Economics from the University of Barcelona; he previously worked at the International Monetary Fund)
Copyright Business Recorder, 2022