And it isn’t looking good
IMF’s Extended Fund Facility ran out last year. With the oil cushion and funding gone, and nothing coming by way of taxes and exports (despite tall, loud claims on the last campaign), the deficit only runs further into red
Ishaq Dar is likely to have the roughest of rides of all senior ministers in the run up to the election; if, that is, the Panamagate scandal does not uproot the government before the cycle finishes. There are a number of reasons that the deficit has come under pressure all of a sudden.
First is oil. Way back in ’14, when Imran’s dharna seemed building serious momentum for a moment, the international Brent collapse helped the Nawaz government save face at home. That reined in inflation at a very crucial stage, of course. But, more importantly, the elbow room also helped the deficit; a rarity in Pakistan’s economic history, which scores precious political points as well.
Secondly, there are no convenient injections this year. IMF’s Extended Fund Facility ran out last year. With the oil cushion and funding gone, and nothing coming by way of taxes and exports (despite tall, loud claims on the last campaign), the deficit only runs further into red.
And thirdly, this is campaigning year again. That always means extra spending and an extra expansionist fiscal policy. That is also when the current account always comes under stress. There’s the Orange Lines and mega power plants and big highways to complete just in time for the vote. Guess where all the funding comes from.
That, invariably, brings us to where the government goes to when there’s no conventional form of revenue (taxes and exports) and no funding (IMF) and the exogenous environment turns unfavourable (oil). The local money market, meant to provide funds to the private sector, is now once again servicing the government for its day to day functioning. This is text book crowding out effect, where the private sector – the life and blood of market economy – is denied its own life and blood (venture capital, etc).
Resultantly there’s an economy unable to generate revenue, with its own manufacturing and trade jeopardised, with stagnant wages and rising prices, and of course slowing growth, just when the general election is round the corner. To make matters worse, private investment is out of the question. And those valuable funds are not going to projects that will bring returns, they are dead investments just financing the running of the government.
A very different picture appears if you ask the government, of course. Dar sb never minds the deficit; or he’d have left his job some time ago. He’s never been much troubled by low taxes and exports either. In fact, pretty much all he’s done over the last year or so is put as many eggs as he can in the CPEC basket.
And that is smart economics. CPEC is the game changer, after all. It will change the fate of Gwadar, Balochistan, Pakistan, and pretty much everything within trading distance of the ancient Silk Route. Yet despite the novelty factor CPEC is, at the end of the day, a major Chinese investment. Nothing wrong with that either. Just that the coming months and years might not be the sweetest the Chinese economy has seen in quite a while.
If Trump really goes all in and slaps Beijing with sanctions, the Middle Kingdom might well wish to, strategically of course, revise its generous neighbourly investments at least for the immediate term
Trump’s made no secret of his protectionism. Even more bluntly, he’s already accused China of being a currency manipulator – something the White House has stopped short of doing since the Bush Jr days. It’s a strange phenomenon by Pakistani standards, but currency manipulation is about as grave a crime as they commit in international sovereign finance.
If Trump really goes all in and slaps Beijing with sanctions, the Middle Kingdom might well wish to, strategically of course, revise its generous neighbourly investments at least for the immediate term. But even if CPEC goes full steam ahead, it’s still a good 10-15 years before any quantifiable benefits start rolling in; or the so-called economic multiplier is materialised. For right now, CPEC’s only a psychological thing to win votes. In real, intrinsic terms, it amounts to little more than zero.
That leaves Pakistan with a lot of work of its own to do. Sadly, not much has really changed economically since PML-N rode in so forcefully in ’13. None of its promises, from the power crisis to the tax net, have been honoured. In the 21st century elections are primarily about the economy. From that point of view, the ruling party has a tough climb ahead of it.