It looks like the monetary authority will not pull any punches. Reading between the lines, the State Bank of Pakistan’s latest quarterly report on the State of Economy has flagged several shortcomings in the government’s economic management. It may well be that the SBP is playing for an audience of one – after all, the IMF is insistent on SBP’s autonomy and the latter wants it, too. But standing up to for sound policies is warranted in any case, and this latest dispatch to the Parliament should serve that purpose.
In a veiled critique on the previous economic team, the report puts some of the blame for economic slowdown on equivocations about going to the IMF. The report states that “uncertainty regarding decision on the IMF program for BoP support hampered business sentiments”. This obviously contrasts with the swift decision-making under the new economic team, which now has the IMF financing approved, an ambitious fiscal consolidation underway, and external financing committed for FY20.
On external financing, the authority cautions the government that a strategy dependent on securing bilateral inflows alone will not cut it. It noted that “while the realized bilateral inflows from friendly countries did provide some support to foreign exchange reserves, its adequacy is still below the three-month of import coverage and the overall BoP position remained weak”. The warning is apt, because unconditional bilateral loans are preferred by governments over multilateral financing that has strings attached.
Perhaps the most biting reference to government’s economic inadequacies is found in the fiscal discussion. The report attributes fiscal deterioration, despite PSDP cuts, on a number of factors, including economic slowdown and the stubborn nature of current spending. But it singles out abysmal revenue mobilization in FY19 on a “lack of tax effort both at provincial and federal level”. Perhaps that’s a message to the machinery to do better in documenting the economy than simply offering tax amnesties.
And even if the government did everything right in following through on its “demand management” measures, it would still not manage to achieve the trifecta of external sector balancing, fiscal consolidation and controlled inflation. The message: “current stabilization agenda needs to be reinforced with deep rooted structural reforms”.
The structural reforms mentioned are the same as IMF’s structural benchmarks: a massive re-engineering of the energy sector, expansion of the tax net, limiting subsidies to targeted interventions only, ending arbitrary tax exemptions, and (wait for it), privatisation and/or overhaul of the bleeding state-owned enterprises. The central bank has indirectly challenged the sitting government by stating that this unpalatable reform menu will require “serious realization and commitment”. Time to act!
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