The year end blues

As the year draws to an end there are conflicting views on the current economic situation of Pakistan. On the one hand, the stock market is booming and crossing new heights on a daily basis - the PSX 100 index has crossed 46000 points for the first time in its history. The punters are gung-ho and predicting the market achieving even greater heights. On the other hand, Pakistan's critical economic indicators of growth, investment, employment and exports are showing stagnation and negative trends portraying a prolonged period of economic underperformance. So the question on every mind is: what is the future prognosis of the economy?
As far as the stock market is concerned, it is conventional wisdom that a rising stock market is an indicator of buoyant future economic performance. Yet it doesn't take much turbulence to reverse the trend. In recent history, a bull market was changed into a bear market when the last government couldn't manage the enormous increase in oil prices that hit the world economy in 2008. The oil import bill, inter alia, led to a balance of payment crisis and collapse of the Pakistan stock market. The horrendous government policy of placing floors on the stock market led to the wiping out of many fortunes and the exit of Pakistan from the MSCI emerging market index.
Following the conclusion of a new $11.3 billion IMF Stand-By Arrangement in November 2008, the market steadied and started improving. However, the programme was suspended in May 2010 badly impacting the market as the PPP government failed to implement the reform agenda and meet the performance criteria agreed in the programme. Finally, it had to abandon the programme in September 2011 putting the seal of failure on it. The biting conditionalities related to containing the fiscal deficit, imposing the value-added tax and slashing the energy subsidies, were sacrificed at the altar of political expediency. The reforms needed bipartisan support but that was not forthcoming as PML-N mounted a successful campaign to derail the government's policies agreed with the IMF. By the time elections were held in 2013 Pakistan was close to default and desperately needed an IMF bailout.
The new PML-N government quickly concluded a new $6.64 billion EFF programme with the IMF. The programme was short on reform and long on capital market debt but it enabled the government to successfully complete the programme albeit after getting a windfall in 2014 of sharply falling oil prices. The programme led to accumulation of Rs 22 trillion in public debt by 2016 compared to Rs 6 trillion in 2008, even exceeding the debt limits prescribed by the fiscal responsibility and debt limitation act. In spite of shortcomings, the recently visiting World Bank President and IMF Managing Director have been effusive in their praise of the government achievements. The completion of the programme has been well received by the international financial press and coupled with the fanfare of the CPEC, euphoria has been created. In addition, funds flowing out of the gummed up real estate sector and the fact that Pakistan market is still relatively cheaper than regional markets, PSX is currently enjoying a huge boom.
On the negative side, recent headlines in national newspapers are highlighting many threats to the economy that include the textile industry's competitiveness crisis, the bleeding farmers protests on the roads, the real estate sector at a standstill, FBR's failure to expand the tax net, falling tax receipts and revenues, the suspension of the ADB loan for the power sector reforms, falling exports, the warning by the World Bank on excessive sovereign guarantees being issued by Pakistan for the CPEC projects, the crowding out of the private sector by the banking industry and many more headlines that are all early warnings for a potential derailing of the economy and loss of stability going forward. Considering that next year may well be the election year and traditional profligacy spending adopted by ruling parties in election years being legendary, risk to the economy will be multiplied manifold.
The parting words of the IMF for the people of Pakistan have to be taken seriously and strategies have to be formulated and implemented accordingly. The government would be wise to heed the IMF advice encapsulated below:
"Moving forward with key structural reforms is pivotal to foster higher and more inclusive growth. Restructuring and attracting private sector participation in public enterprises is needed to ensure their financial viability and reduce fiscal costs. Completing the power sector reform will be important to strengthen the soundness of the sector and support growth. Continuing to move forward with the implementation of the new business climate reform strategy will help increase competitiveness, foster investment, and support private-sector-led growth and job creation."
In continuation of the structural reform agenda indicated above by the IMF, a home-grown reform package has to be implemented that comprises comprehensive institutional governance reforms to improve the working of the cabinet, the ministries, the civil services, police and judicial systems at the federal, provincial and local government levels if Pakistan has to quickly achieve its place among the fastest growing market economies of the world.
The government has not even looked back since parting of the ways with the IMF. It has miserably ignored the reform agenda left behind by the IMF. In the power sector, deregulation and reform have not been the priority. The power sector lacks competition and a working power market, wheeling options have not been implemented in letter and spirit and barriers to entry have not been demolished. Government management of the sector has been catastrophic for the economy with high inefficiencies, losses and circular debt hounding the sector. Creating expensive and environmentally damaging coal power has been the focus.
The problem is that we are inducting power at exorbitant prices - two to three times the cost of power that other regional countries are inducting. This will leave Pakistan highly vulnerable in its quest for competitiveness in global markets and can invoke a future balance of payment problem. In addition, the environmental damage will ensure that Pakistani citizens are victims of year round suffocating smog as is witnessed in the Chinese and Indian cities.
Clean, efficient renewable energy with transparent decision-making is the way forward. In Pakistan, hydel, solar and wind power backed up by domestic Thar coal power should be the power mix. The colossal investment in coal power as part of CPEC is a looming disaster for Pakistan but the government of Pakistan and Nepra are oblivious to our predicament. The investment in coal power can be easily diverted to multipurpose dams and solar power generation. The Chinese have state of the art experience in both dam construction and solar technology. This combination can bring a rural and urban economic revolution in the country.
If the current downturn in exports continues, coupled with rising oil prices or declining remittances along with projected high debt repayments a crisis is brewing; it could trigger a creeping loss of reserves and loss of stability warranting a return to the IMF. The recent gains in the stock market and the feel good factor would disappear exactly at the time when the nation would be heading to the polls. It will augur well for the government to pay heed and embark on the institutional and policy reform agenda to lend resilience to the economy and grasp the 'moment of opportunity' so eloquently expressed by IMF chief Christine Lagarde last month.
(The writer is a former Finance Minister)