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Political uncertainty comes at a time when the macro numbers are beginning to deteriorate. This could pose serious challenges and can be addressed only by an elected government with a longer time horizon to design and implement an economic recovery plan - and engage with the international community to support it.

The somber macro outlook, captured well in aggregate numbers, shows that ensuring economic sustainability remains an unfinished task. In 2022-23, our external financing need will balloon to $35 billion, expanding further to $42 billion in 23-24 before coming down. Meanwhile, gross international reserves are projected at around $20 billion for the next two years. We thus need external financing, and lots of it, to avoid the bleak Sri Lanka-like situation.

The most recent episode in this saga goes like this. In 2017-18, the last year of the PML-N government, external financing need was 9.6 percent of GDP. It was a similar 9.5 percent when PTI left office. What drives this are the current account deficit (CAD) and amortization (repayment of loans). CAD in 2017-18 was 6.1 percent and a lower 4.1 percent in 2021-22. In fact, the Pakistan Tehrik-e-Insaf (PTI) government had shrunk the deficit to 0.6 percent last year but our voracious appetite for imports and increase in international prices bumped it up again.

Amortization was $10.7 billion in 2017-18, will be a whopping $22 billion in 2022-23 and a monstrous $28 billion the following year. The exposure to external debt will continue to pose serious economic risks. Its servicing saps resources for much needed public investment and amortization spikes put pressure on reserves and the exchange rate. Immediate action is required to improve the debt profile as well as medium-term structural reforms (discussed below) to improve the fiscal balance that creates the need to borrow.

The external financing requirement is expected to be met by private investors, multilaterals (World Bank, Asian Development Bank), bilaterals (China, the UK, etc.) and the International Monetary Fund (IMF). Although the IMF will provide a modest US$ 1 billion of the total, the rest is conditional on successful implementation of the IMF programme. This is what makes the programme so vital.

At the heart of the IMF programme is a tight fiscal deficit of 4.4 percent. If we go over that, the financing requirement becomes larger. The deficit was 6.4 percent in 2017-18, increased and remained high in the first two years of PTI government and then came down to 7.1 percent in 2020-21. It was expected to go down to 5.5 percent this year but didn’t because expenditure was revved up to counter political opposition.

Even though Covid made it difficult to achieve the fiscal targets, its handling revealed remarkable state proficiency in managing a pandemic and received worldwide praise for institutional design and specific interventions. That capability must be harnessed to fix the economy.

The fiscal deficit is driven by the long mismanaged energy sector, untargeted subsidies and stagnant tax revenue. The PTI government, like the previous governments, struggled to address these core weaknesses of the economy with moderate success. These need to be built upon.

The PTI government frequently passed the energy deficit (due both to rising fuel prices as well as system losses) on to consumers in higher prices, as the IMF programme required. This is never popular. It could have been handled better by plugging energy system leakages in billing, transmission losses, prevention of theft and untargeted residential and industrial subsidies. There was some success in lowering energy cost by taming power capacity payments, upgrading transmission and switching to cheaper generation but effective solutions require a longer time horizon (more hydel and other renewables and shutting down costly inefficient generation) and a sharp focus on results.

Everybody agrees that industrial subsidies need to be streamlined. The subsidy design should ensure that it achieves the policy objective. The PTI government started some analytical work to that end. It needs to be put on the front burner by the next elected government.

Targeted household subsidies, whether for energy or general income support, require a reliable information highway to subsidize only those in need. In Benazir Income Support Programme (BISP) (subsumed under Ehsaas), we are fortunate to have such a highway to the rural poor. However, a large number of people in urban areas are just above the poverty line and, as Covid demonstrated, are highly vulnerable to shocks. Economic slowdown, inflation and rising energy cost require extending the highway to such low income families. The recently completed National Socio-Economic Registry has updated the highway and will be of great help.

The Kamyab Pakistan Programme was an attempt to address the vulnerable households as we restructure the economy. Such programmes need to be gender and environment sensitive. Malaysia, Turkey, Iran and Bangladesh (and common sense!) show that two earner (husband and wife) families cope with economic shocks much better than those with a single earner. Complementary programmes that improve the quality of air and water lower health costs, which can be a significant portion of low income expenditure.

The international community’s reluctance to bridge the financing gap via concessionary lending is growing. Such lending is financed by taxing donor country’s citizens and they know that only a quarter of those eligible to pay taxes in Pakistan are in the tax net. Many under-report their income by a huge margin. So, we squeeze those already paying tax and carry a begging bowl in the international arena. In the name of fairness and “khuddari”, this has to stop.

In the last six months, tax collections increased by an estimated 12 percent in real terms. A major effort was about to be launched to substantially expand the income and sales tax base. This should be taken further by throwing the full weight of the state behind Federal Board of Revenue (FBR) to increase tax revenue to 15 percent of GDP.

With the recently acquired autonomy, the State Bank of Pakistan (SBP) is a credible partner in managing crises and restoring growth. A competitive exchange rate has spurred exports and initiatives to digitize and deepen the financial system have attracted non-resident savings (Roshan Digital Account). These are commendable achievements of PTI government and must continue, under the technically capable leadership at the SBP.

With the world’s largest canal system, fertile soil and a long standing farming tradition, agriculture should be key in taming inflation and achieving export led growth. Modernising farming methods and improving price information are thus essential. The recent efforts in that direction must be built upon.

We have a revealed consensus across the political divide on the core recovery plan. Let’s get on with implementing it!

(The writer is former Dean LUMS, Chairman Consortium for Development Policy Research (CDPR))

Copyright Business Recorder, 2022


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