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Pakistan Tehreek-i-Insaf-led coalition government headed by Prime Minister Imran Khan is going to complete, in a few weeks' time, the first year of its five-year tenure with the country's economy still too far from the promised state of Riyasat-i-Madina that the PTI had pledged to launch in its election manifesto. The one major achievement that it has managed to accomplish so far relates to its 'success' in obtaining a three-year Extended Fund Facility (EFF) programme from the IMF amounting a little over $6 billion. But on the way to qualifying for the programme, the government had to bring in a new, non-elected technocratic team of official economic managers having no affiliation with the political philosophy of PTI. The team appears more attuned to the philosophy of the now much maligned neo-liberal doctrine of Washington Consensus which probably makes completing the current EFF with any degree of success too doubtful. In fact, it is likely to meet the same fate as its predecessors.
During the time, the ruling party was trying to make up its mind whether or not to go to the IMF and after it finally made up its mind and fired its first finance minister Asad Umar, it became shockingly apparent to the nation at large that PTI had come into the government without a plan on how to tackle the country's economic challenges. And it also appeared as if the Party had no one, not even a team, on its roll who could be regarded as the economic brain of the party which was even more startling because its very mandate was for resetting the economy after having eliminated corruption indulged in by the ruling elite.
Indeed, the major economic challenge of the country is high consumption, low production and low savings and investments. The gap is widening between saving and investments, which has pushed its debt almost impossible to manage therefore pushing the country to seek foreign assistance, immediate (Saudi Arabia, the UAE and China) as well as mid-term (IMF).
And as is usual with such IMF programmes the first phase of its so-called reforms which, in our case this time, was front-loaded has introduced a highly self-propelling wave of all-round price increases affecting the population across the board but the brunt of it falling on the middle and poorer classes.
The sudden jump in inflationary pressures has caused a substantial increase in discount rate with the interest rate now over 13 percent. And while exports have not picked up the way it was hoped following a drastic depreciation of the rupee vis-à-vis the dollar, the prices of essential imported inputs like raw materials and intermediaries needed to fabricate exportable surpluses shot through the ceiling resulting in our exports being priced out of the world markets.
And viewed in the context of Fund's prediction that the economy would slow down in 2019-19 to around 2.4 per cent in the process of achieving the desired macro-economic stability the huge revenue target fixed in the new budget and which has also been endorsed by the Fund looks too far- fetched and sans any economic logic.
No doubt, Pakistan needs to mobilize enough domestic tax revenue to ensure funds for social and development programs, while reducing debt and paying for defence and current administrative expenditures. But the immediate impact of the Fund's front-loaded reforms has upset Pakistan's economic engine so much that the major economic generators seem to have gone into deep slumber as a result of depreciation of the rupee, galloping inflation and hikes in interest rates. The back-bone of our economy, the textile sector, is in a state of wait-and-watch while our fastest growing sectors, like automobile, banking and construction seem to have slowed down considerably.
Every IMF programme that we have signed in the past has traditionally carved out, in the first flush, its pound of flesh from the poorer sections rendering them even poorer through all round price increases. This time as well the same has affected not only the poor but also the middle classes the most.
According to the latest assessment of the IMF in recent years, import-led consumption has propped up growth in Pakistan and helped hide the problems of an economy riddled with inefficiency and without a strong export base.
Economic growth, which reached 5.5% in the fiscal year to June 2018, is expected to slow to 2.4% this financial year, according to IMF estimates, barely enough to keep pace with the growth in a population that now numbers 208 million.
The insistence of the Fund on broadening the tax base and seeming determination of the government not to give in to the blackmail of the moneyed classes to stop asking them to pay what is due from them to the exchequer should be welcomed whole heartedly by all thinking Pakistanis who know that the increasing dependence on foreign dole not only severely curtails a country's political sovereignty but it also keeps it perpetually anchored to abject poverty.
However, in order for the government to be able to make the richer classes pay their tax dues honestly, and introduce the second phase of the EFF which starts from September this year the government needs to bring in some highly essential legislations. But to get them passed by Parliament the ruling coalition has only about a margin of 12 in the National Assembly and far too negative a margin in the Senate.
This state of affairs demands the government to develop political consensus in the country which in essence means that the government open direct dialogue with the main opposition and reach the desired consensus on the basis of political give-and-take. This, in the government's current state of political mind-set, however, appears rather impossible.
The government has committed to making amendments to the State Bank Act, the Nepra Act, the Anti-Money Laundering Act and the State-Owned Enterprise Act as part of the IMF programme. Additionally, cooperation of the provinces has also to be obtained to generate the kinds of surpluses the government is relying on to meet its fiscal deficit target for the current fiscal year.
Failure to make these legislative amendments and enlist cooperation of provinces will mean the government will have to seek waivers as the programme reviews get under way. The first review is due in December. In case the Fund refuses to give the waivers, the programme would itself come to an end unleashing a new wave of economic uncertainties for the country.
To digress a little, failure to get out of the FATF 'grey list' could have implications for private capital inflows in the ongoing fiscal year. For the current fiscal year, which ends July 2020, the Fund has projected an external financing requirement of $25.62 billion and it has identified available financing totaling $27.6bn. Of this amount, $7.2bn is projected to come from private creditors, ones who would be sensitive to Pakistan's continued placement in the grey list.
Fund disbursements as well as those by other multilateral lenders such as the World Bank and Asian Development Bank would, however, not be affected by Pakistan's fate at the FATF. Pakistan would have funding from the World Bank, Asian Development Bank and other bilateral creditors amounting to in excess of $38 billion, which is crucial for Pakistan to meet its large financing needs in the coming years.
It appears the jury is still out on how the one-year old government has fared in the context of its performance on the economic front. Of course, if it were to finally succeed by December this year in getting the richer classes to pay their taxes honestly, the PM would perhaps face no problems on the political front. On the other hand, in case if he fails, the second year of tenure would perhaps be even more tumultuous than the first one, both in terms of economy and politics.

Copyright Business Recorder, 2015


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