Déjà vu

After months of painstaking measures and waiting, the resumption (and extension) of the IMF’s EFF program has sent a positive vibe across economic landscape. This should provide the country’s bilateral and multilateral funding sources with the needed comfort to extend further loans. Good job by Miftah and team! But we have been here before, drenched in the euphoria of getting funded by the lender of the last resort. How long will the latest breather last? Or will this time be different, structurally speaking?

Listening to the soft-spoken finance minister’s recent statements, it seems that Pakistan’s perennial BOP woes are mainly a cash-flow problem gone haywire. As long as authorities can contain the import figure around the level of combined sum of exports and remittances – which is in the vicinity of $5 billion– the current account deficit won’t go off kilter. Exports require, among other things, higher capacity and global market access by industrialists, and remittances are more of a household phenomenon. Therefore, the onus falls on the government’s high-handed import-management measures to contain the deficit.

The problem with that containment strategy is that continued demand suppression is neither a long-term remedy, nor is it politically-feasible for a government that is embattled or approaching an election year. Having swollen the bitter EFF pill in June 2019, the ousted PTI government could only follow the balancing formula for so long. It was forced to unleash pro-growth budgets in Covid era, first in June 2020 and then in June 2021, with the latter exacerbating macroeconomic vulnerabilities throughout FY22.

Ideally, macroeconomic management should be disengaged from the necessities of electoral cycles. But that is rarely the case in reality. Recent history has shown several times that political transitions tend to make BOP woes worse. Question, then, remains: how long does the Shehbaz government think they might have before they also start feeling the pressure from the industrialists to start priming the economic pump? There are several factors at work that directly and indirectly determine how long the government can stick to the balancing formula.

Elevated inflation, tight government finances, volatile international prices, and stern commitments with the Fund potentially rule out any drastic changes in the current fiscal-monetary posture in the coming months. Also watch out for the relative level of political instability in the country. If the PDM-PTI rifts remain at a tolerable level, the import-containment strategy may survive late into FY23. In the end, the EFF resumption this week may have the inadvertent effect of leading to on-time elections late next year.

The ongoing floods and the loss of lives, livelihoods and assets have complicated the picture. The macroeconomic impact of the devastations may take some time to emerge. It cannot be said with certainty right now whether floods will raise imports more than they will lower exports. If the net impact lands on the side of higher imports, the finance minister has suggested that it won’t necessarily affect the FY23 external financing requirements, as floods-related foreign assistance will ensure that related imports are paid for. For now, floods-related expenditures and financing both remain mired in uncertainty.