EDITORIAL: The senior leadership of the eleven parties’ coalition met under the chairmanship of Prime Minister Shehbaz Sharif and rejected former Prime Minister Imran Khan’s repeated demand during his almost daily public meetings to immediately announce the date for ‘immediate’ general elections or else face a sea of protesters in Islamabad.
While reports indicate that the 11 parties are focused on reversing the previous administration’s electoral reforms that they reckon provides an advantageous edge to the Pakistan Tehreek-e-Insaf, it is, however, imperative for all stakeholders to acknowledge the grim reality of the dire straits that the economy is in today.
Foreign exchange reserves today are less than a month and a half of imports, a rupee in an almost free fall that the State Bank of Pakistan does not have the reserves to check, a high discount rate that is a deterrent to output and therefore the Gross Domestic Product (GDP), a budgeted current expenditure outlay that is 75 percent higher than in 2017-18, a domestic debt that is 67 percent higher than in 2018, total external debt incurred during the past three and a half years of a historically high 56 billion dollars and an unsustainable budget deficit projected at more than 9 percent of GDP.
Business Recorder would strongly urge all stakeholders to comprehend the gravity of the situation and not simply dismiss the appalling macroeconomic indicators as an outcome of political uncertainty that would resolve itself once a stable government is in place.
It is recognised that the decisions that need to be urgently taken are going to be politically extremely challenging which, it appears, the senior leadership of the coalition has agreed to implement. However, for the success of these critical mitigating measures they need time, at the very least a year, and unstinted support from all stakeholders.
Failure to get time and support would imply placing the onus of these decisions either on an: (i) unelected caretaker setup, not constitutionally empowered to take fiscal and monetary policy decisions with serious consequences on the quality of life of the general public; this setup would of course have to be approved by all political and non-political stakeholders, which appears to be a difficult prospect given the refusal of Imran Khan to engage in any dialogue with any of the stakeholders; and (ii) hold early elections which cost the economy approximately 440 billion rupees to hold the 2018 elections — money that the treasury simply does not have. Be that as it may, an elected government that would come in as a result of elections, would have a five-year term and the mandate as well as the vital honeymoon period to formulate economically challenging policies.
While neither the coalition partners nor the economic team leaders of the previous administration have identified the way forward yet, in spite of the charged political atmosphere today, which militates against a consensus on even the most compelling economic reforms, one may assume that there would be consensus on at least two measures: (i) the need to ensure the success of the seventh International Monetary Fund (IMF) review that would not only ensure rollover of existing debt and assistance from friendly countries but also strengthen reserves that would have a calming impact on the external value of the rupee; this would be contingent on reversing the 28 February 2022 relief package which in any case is due to expire by end-June.
However, if the coalition government takes this decision it is a foregone conclusion that the former Prime Minister would accuse it of fuelling inflation; and (ii) the current expenditure has been allowed to rise to an unprecedented level, thereby fuelling the budget deficit.
There is a need to slash it which would require major sacrifice from the recipients but also reforms in the pension system (under consideration by the Khan as well as the previous PML-N government) and to slash domestic debt through some adjustments with financial institutions holding government debt.
Paolo Guidotto and Manmohan Kumar, IMF staff members, in an article titled Managing Domestic Public Debt gave two proposals notably (i) domestic public debt is issued in nominal terms — that is, it is denominated in domestic currency and not indexed to reflect changes in the general price level.
But since its real value is affected by changes in the price level, the presence of nominal debt itself has several implications for macroeconomic policymaking in general, and the fiscal picture in particular.
Perhaps the most important implication is the potential to tolerate or encourage inflation, because, at least superficially, rising prices hold the promise of reducing the debt burden in real terms… . One possible way of eliminating, or reducing, the temptation for inflation, would be to index the debt — that is, tie the domestic currency value of the principal to, for example, the consumer price index, the exchange rate, or both…debt indexation may be ineffective, or even counterproductive, if fiscal adjustment is inadequate; or (ii) change the maturity structure. However, care must be taken to change the maturity at a time when the discount rate is not as high as it was in 2019.
It is needless to say that the state of the economy merits urgent attention of all stakeholders — be they in government or in opposition or institutions. Unfortunately, however, it increasingly appears that the current economic situation wants to force the incumbent government to sink or swim in haste.
Copyright Business Recorder, 2022