EDITORIAL: Chairman Pakistan Tehreek-e-Insaf (PTI) Imran Khan reiterated over the weekend that the cost of political uncertainty on the country’s fragile economy is significant with elections the only solution – a stance vigorously supported by economists and analysts alike.
There is overwhelming empirical evidence globally that political uncertainty severely undermines market sentiments even if the macroeconomic fundamentals are strong, which is not the case in Pakistan, thereby negatively impacting on all Gross Domestic Product (GDP) growth components particularly investment in productive activities as well as portfolio investment with a cascading effect on exports and thereby on the balance of payment position.
While not disagreeing with this universal hypothesis it is relevant to note that considerable uncertainty generated prior to the dissolution of the Punjab and Khyber Pakhtunkhwa (KPK) assemblies with respect to meeting the contractual obligation to generate a stipulated amount of provincial surplus (through the signing of a Memorandum of Understanding shared with the International Monetary Fund as a prior condition of the seventh/eighth review documents) has been resolved with the installation of caretaker setups in two provinces.
The total budgeted provincial surplus for the ongoing year was a hefty sum of over 800 billion rupees with Punjab and KPK’s share well above 50 percent.
However, there are three other relevant factors impacting on the state of the economy to the detriment of the general public’s quality of life – factors that may well trump the element of political uncertainty on the deepening economic impasse.
First and foremost, there is widespread consensus that Pakistan has no other option but to stay on the IMF programme as roll-overs and additional loans from friendly countries are linked to the success of the pending review - with around 6 billion dollar inflows to date while the budgeted requirements for foreign borrowing are around 40 billion dollars that include around 22 to 23 billion dollars interest and repayment of principal as and when due, shoring up the foreign exchange reserves by 4 to 5 billion dollars, balance of payment support of a similar amount and the least explicable around 5 to 6 billion dollars to meet the budget deficit fueled by a massive rise in current expenditure.
Reports of reticence by two out of the three friendly countries in disbursing pledged assistance is a major factor in the stalled IMF programme today.
China has rolled over 700 million dollars recently, a country that has long-term strategic interests in Pakistan, yet there are almost daily disturbing reports that the Chinese government is deeply concerned at the government’s failure to meet its contractual obligations under the China Pakistan Economic Corridor (CPEC) projects that account for Sinosure, the Chinese insurance company, not giving its approval to loans/investments in Pakistan.
Second, and perhaps more relevant, there has been foot dragging and flawed policies by the incumbent economic team leaders with respect to fiscal policy (reliance to the tune of over 80 percent on indirect taxes whose incidence on the poor is greater than on the rich) and monetary policy (control of interbank rate that was abandoned on 26 June 2022 leading to the scheduling of the visit of the IMF review mission, a pledge abandoned soon after that led to a widening trust deficit and a market-based exchange rate was again adopted last week) account for the deepening economic impasse more than the prevailing political uncertainty.
These policies have not only cost the country more than 3 billion dollars in lost revenue with two-thirds accounted for by the inane decision to control the interbank rupee rate but also massively dampened market sentiment.
This element is not under consideration of the eleven-party coalition government though Foreign Minister and Chairman of the second largest party in parliament, Pakistan People’s Party (PPP), Bilawal Bhutto-Zardari, threatened to leave the coalition unless the Ministry of Finance meets pledged assistance to the flood victims.
While all the prior conditions that pertain to decisions required by the government have finally been met, including raising taxes on utility rates and the petroleum levy, yet the inordinate delay in meeting these conditions has upset the scheduled reviews and disbursements by the IMF.
The ninth review as proposed in seventh/eighth review documents (16 August 2022) was on 3 November, tenth on 3 February and eleventh on 3 May. It is unclear what the new schedule will be though it is doubtful if the IMF will consider clubbing more than one review given the massive trust deficit between the current economic team leaders and the Fund mission team.
And finally, all structural reforms remain pending – be they in the power and tax sectors, the pension system that is entirely funded from the budget with no employee contributions or be it the poorly run state-owned entities.
There are reports that the cabinet was informed that structural reforms will have to be announced in the budget for next fiscal year however given the deferrals of all politically challenging reforms announced in past budgets, including a tax on traders, were abandoned with the threat of strike action, the likelihood of their implementation in an election year appears even more remote than usual.
It is increasingly clear that while political uncertainty is no doubt exacerbating the problems facing the economy yet they are perhaps secondary to foot dragging/mishandling of issues relating to the economy and the friendly countries.
Copyright Business Recorder, 2023