Economy: this madness must end

As of last week, forex reserves held with the central bank declined to $6.7 billion. The International Monetary Fund (IMF) review is delayed till at least mid of January 2023. Financial markets are nervously holding their breath over what might happen next. Both State Bank of Pakistan (SBP) governor and the federal finance minister are trying to defuse the tension.

The former is of the view that only $4.7 billion ($1.1bn commercial loans and $3.6bn multilateral debt) external debt may not be rolled over in the current fiscal year. While finance minister Dar has pinned his hopes on additional $3 billion deposits from a friendly country (most likely Saudi Arabia).

Yet, the clarity on promised funding is still missing. Reportedly, Saudi Arabia has conditioned the continuity of financial support on attainment of political stability. Which raises the following question: what actually constitutes political stability in the eyes of friendly nations.

Even if bilateral flows from Saudi Arabia and China are restored, the risk of default will remain imminent without IMF’s nod. Furthermore, a funding gap has emerged for the next several weeks before negotiation with the Fund can be resumed, due to winter vacation in western capitals.

This interim period may prove critical for the federal government’s survival.

Party leadership doesn’t want to go into elections without regaining the lost political capital by providing economic easing. However, there is no fiscal and external space to do so. Under the IMF programme, there is a narrow path and that is in sharp contrast to what the Pakistan Muslim League-Nawaz (PML-N) wants.

That is why Dar is pressing for support from friendly countries, even though he is aware that it won’t be enough. A return to the IMF is inevitable for Pakistan’s solvency. The best he can manage is to buy time. Here, the political stability condition from Saudi Arabia comes into play.

There is no stability without some sort of agreement with the Pakistan Tehreek-e-Insaf (PTI). That is why Dar has held several meetings with President Alvi. Both Dar and Alvi are close confidants of their party leaderships.

Dar perhaps has two options in mind. One is to arrange financing without Imran Khan’s (IK’s) support (‘Plan A’) while the other is to have IK and PTI on board (‘Plan B’). An ideal situation is ‘Plan A’. That is to get financing from Saudi Arabia and China without having any agreement on election date and other matters with the PTI. However, this would give a breather for 2-3 months maximum. And after that there is nothing but the IMF.

Assuming general elections are to be held in October 2023, the government may depart after announcing a supposedly friendly budget.

How can this happen with the IMF? And even if the budget is to be people friendly, there would be a case for increase in petrol and diesel taxes, increase in gas prices and new taxes, currency depreciation, increase in interest rates and higher inflation, prior to the budget. That would do enough damage to PML-N’s political capital, which may not be restored despite a friendly budget.

The government may need another 6-9 months for any possible (yet risky) recovery to inspire a feeling of relief. This means taking the elections to 2024. There are indications from PML-N leaders of wanting to go down that route.

Constitutionally, there is room to do so. However, IK would not take such a move lying down. There would be more agitation by IK. His popular support is already at peak levels. And the support is likely to increase due to growing economic pains.

SBP is further suppressing imports. Costs are going to increase further. Businesses are seriously considering layoffs. Conservatively, over 500,000 people have lost their jobs (including daily wagers) in the textile value chain alone. With all these pains, people and PTI would not let the government go the route of extended term easily.

Then there is no political stability in this scenario. And perhaps, friendly countries may not support such an option. That takes Dar back to ‘Plan B’, i.e., getting IK on board. With IK on board, the government must go for general elections latest by October 2023. In that case, staying in the government till July 2023 may not be a great option for PML-N. Back in May 2022, the party wanted to improve the economic conditions before going into elections.

The party leadership had reservation on the then finance minister Miftah Ismail’s management, and it was hoped that Dar could rescue the sinking economic ship. Now, it is crystal clear that Dar has no magic wand. He must run on the same narrow path. Seven months on, PML-N is caught in the same dilemma– to stay or leave. The party leadership is boxed in, and the situation is getting claustrophobic.

One option pitched by political pundits is for Nawaz to return and restore the party’s political capital by going on a campaign trail immediately. There have been talks of his return to face the pending court cases. That may be great for restoring a level-playing field. However, once he is back and the economy does not recover, PML-N would have no other rabbit to pull out of the hat.

That is why ‘Plan B’ is important. And if Dar is wise enough, he would like to go for elections earlier than later. For that to happen, he will have to reach an agreement with IK on election dates, caretaker government, election commission, and other matters.

Only then can he proceed to Saudi Arabia and China to expedite bilateral flows, as both have demanded an end to political instability. This is the only way Dar can leave restoration of IMF programme and taking of tough decisions on caretakers with all major political parties owning those actions in case they return to power post elections.

Although PML-N may not be able to restore its political capital in this case, it would at least elude any further damage. Of course, it is no easy decision. Over the past 10 years, the conspiracies in the corridors of power by Punjab-based political players have made economy its casualty.

Yet, not a single one of them has any road map to offer to save the country. Even today, both major parties and their allies are looking to spend lavishly before general elections.

Punjab is already spending high sums on print ads and TVCs. Next will be doling out of funds to MPAs and MNAs, and then aggressive expansionary election budgets in May 2023. For far too long, the economy has been sacrificed at the altar of political maneuvering and machinations. It no longer has the capacity to absorb any more games or shocks. The madness needs to end, now!

Copyright Business Recorder, 2022