- The economy heading south
Perhaps a quintessential optimist, Asad Umer the finance minister, would make us believe that the economic crisis is all but over. Previously the ruling PTI (Pakistan Tehreek-e-Insaf) oft repeated mantra from the very top to bottom was that the PML-N government through its incompetence and corrupt practices had virtually bankrupted the economy.
Predictably the markets reacted very negatively to such claims. After two massive devaluations – the largest in the country’s history – the rupee was in a free fall against the dollar. To add insult to injury almost simultaneously the discount rate was hiked by 150 basis points.
Naturally after getting a lot of flak from his boss who was egged on by some of the key members of Khan’s kitchen cabinet, Asad Umer was on the mat. The only thing that saved his job for the time being was the realisation that changing ship in mid-course will have even more disastrous consequences.
It is a pity that Asad Umer who was the presumptive finance minister even before the PTI managed to win the elections and form a government had neither the vision nor a plan to salvage the battered economy. The narrative that the previous government had messed it all up was not good enough for the markets nor the investors.
The biggest fallacy created by the PTI leadership was that we need not go to the IMF (International Monetary Fund) as our friends will chip in. However hurried dashes in quick succession to Riyadh, Beijing, Abu Dhabi and Kuala Lumpur by Khan have produced only mixed results. Perhaps with the sole exception of Saudi Arabia that deposited $1 billion in the central bank as a loan. Another one billion dollars tranche received from Riyadh will boost our depleting reserves. However contrary to earlier claims, there has been no other reported inflow.
Regarding the IMF, a rather self-serving logic is being pursued. Initially the spin was that we might not even have to go to the IMF.
Another fallacy deliberately created by the finance minister is that we will not accept the diktats of the international lending agency nor will be blackmailed by it. But at the same time its conditions are being met more than half way.
These include reduction in subsidies on electricity and gas. The minister grudgingly however admits that there is no difference of opinion about what needs to be done between the government and the IMF.
Ironically meeting some of the IMF’s conditionalities might be the only way to restructure a historically flawed economic model.
There is for example no option but to expand the abysmally narrow tax base. The burgeoning circular debt needs to be reduced by cutting power thefts and losses. According to the World Bank, the inefficiency of Pakistan’s power sector causes $18 billions loss a year.
The much-maligned Sharif’s economic czar Ishaq Dar was more clearheaded about the need to go for an IMF bailout package when the PML-N government assumed power in 2013. In fact, the new government had already made contacts with the lending agency even before Nawaz Sharif had taken oath as prime minister.
Why the procrastination and hemming and hawing now? Perhaps the PTI is being hoisted by its own petard. It is trying to translate it flawed rhetoric into policy with disastrous results.
Markets are guided by perceptions of the ground realities. That is why the bourse is heading south. So are the exports and foreign remittances. But the government is assiduously sticking to the all is well fiction.
The latest denouement of the international rating agency Moody’s should be an eye opener for our policy makers. It has reaffirmed the country’s rating at B3 negative, that according to the agency: ‘reflects the sovereign’s high external vulnerability and very low global competitiveness.’
Moody’s has projected that Pakistan’s total debt to reach 76 per cent of the GDP by 2020. It has also lamented low level of foreign exchange reserves amounting to cover less than two months of imports. According to the State bank reserves further decreased by $242 million to $7.26 billion dollars in the week ending December 7.
Post Moody’s, the rating agency Fitch, citing high debt repayment obligations, low forex reserves and a fragile fiscal situation, downgrading Pakistan’s long-term rating to B negative is a double whammy.
After the growth rate rising to a historical 5.8 percent of the GDP last financial, it is expected to fall to 4.3 percent during the fiscal ending in June 2019. Coupled with this bad news is the stock exchange volume dipping further and the market volume hitting a six-month low
As if to rub salt in our wounds, according to the US treasury department, Washington is to continue its economic involvement with Pakistan to ensure, “that it does not fail in the future and stops being such a poor country.”
The US under secretary of the treasury for international affairs also informed Congress that the Trump administration wants to ensure that any IMF loan to Pakistan is not used to pay Chinese debt. This is despite the fact that Islamabad has clarified on more than one occasion that no Chinese debt is due for repayment hence the questions of using any loans to retire Chinese debt does not arise.
The prime minister while addressing an economic forum has finally admitted that wealth creation by itself is not a bad thing. But is he willing to walk the talk? Most businessman and investors will reply in the negative.
The prime minister down, his team and government agencies working under him have vitiated the investment climate to no end. The glib response that NAB is an independent entity with the government having no say over it is simply not good enough.
Virtually everyone with money unless proven otherwise is branded as a crook. Even the courts have contributed to the negativity.
Notwithstanding the penchant for accountability, the nation needs breathing space in order for the economy to grow. A good beginning has been made by the PTI despite its reservations to agree to Shahbaz Sharif heading the public accounts committee.
Perhaps a consensus should also be built within the parliament on how to tackle the economic crisis. The ostrich like attitude that there is no crisis does not help.
The prime minster has done the right thing by opening an office in his secretariat to facilitate ease of doing business. But merely opening an office is not enough.
As it is cost of doing business in Pakistan is one of the highest. In the present atmosphere of fear and intimidation the bureaucracy perhaps feels not doing anything is the safest course.
Similarly, meaningful legislation to ease the cost of doing business is urgently needed. Translating into the numbers game in the parliament it is axiomatic adopting a modus vivendi with the opposition.
