Tough challenges ahead

The most challenging job for the new government is to control inflation, as people have been under the wrath of high prices of almost all commodities during the previous government.

Another economic challenge is debt management, as Pakistan is suffering from low GDP growth with the highest amount of internal and external loans eating up almost all of our revenues to repay them. According to some experts, Pakistan is passing through a period of technical default, as we are paying back loans after getting loans from external and internal sources. It is said that default is sooner or later imminent. A proper long-and-short-term planning and debt management system is immediately needed to get rid of the loans, especially external loans.

Foreign direct investment (FDI) is another challenge for the government, as Pakistan is one of least attractive destinations for international investors to invest in, although it may prove to be a big opportunity for international investors who are normally in search of such investments where they can reap maximum returns and profits. Pakistan could be one such destination but international investors are scared of us owing to multiple reasons, especially the security situation coupled with the political instability. The role of the Board of Investment (BOI) is critical, and needs to be enhanced and expanded by placing professionals in its cadre in place of lethargic bureaucrats. It is very unfortunate that professionalism is a rare commodity in this organisation.

It is not only inflation that has to be controlled but a lot of other economic challenges are in the waiting list as well. Let’s start with the missing long- and short-term economic planning, which is critical to cope with the economic challenges ahead. Pakistan is facing the brunt of high oil prices, commodity prices and rising food inflation. The loan portfolio has become viral crossing all limits with rising debt-servicing that is a real headache. Circular debt is another headache. The trade imbalance is a serious danger, entailing consequences for the current account deficit. The monetary policy of the State Bank of Pakistan is a harbinger of no hope, and is in fact rather hopeless. The IMF programme entanglement is posing another threat, shattering hopes.

International oil prices are now touching about $120 per barrel due to the Russia-Ukraine conflict, resulting in the highest ever fuel prices in Pakistan. The fuel prices in the last three years have risen about 150 percent, electricity prices about 95 percent. As unemployment is rampant, the people are in crisis: facing high inflation while going down below the poverty line. The middle class in Pakistan is shrinking day by day. The new government is in a very difficult situation as far as this challenge goes.

The commodity and food prices have broken all records while breaking the people’s backs as well. All sorts of price indices including the Consumer Price Index (CPI), Sensitive Price Index (SPI), Wholesale Price Index (WPI) have crossed all records in the last three years. Reportedly, a 70-year record is broken. According to the Federal Bureau of Statistics, sugar prices rose to about 83 percent, flour 85 percent, chicken 100 percent, beef 100 percent and edible oil 150 percent in the last three years. The prices of medicines including life-saving drugs are so very high that they are unaffordable for an average Pakistani.

The loan portfolio of Pakistan is another sensitive disturbing area, about 85 percent of our GDP in violation of the Fiscal Responsibility and Debt Limitation Act, 2005, restricting the government not to cross maximum 60 percent. The external debt is about $128 billion, no doubt huge in size and volume and requiring a big financial boost and support for debt servicing. The biggest portion of our annual budget goes to debt servicing. Another disturbing factor in debt management is power and energy related circular debt currently standing at about Rs2900 billion.

The trade imbalances in the form of more than double the imports than exports make things worse. Pakistan needs to enhance its exports through and by diversification of exportable goods and services, especially those with potential in IT exports. The Special Economic Zones (SEZs) under the China-Pakistan Economic Corridor (CPEC) need to be established sooner than later to enhance diversification and branding of exports. There is, in fact, a need for industrial clusters to be created through these SEZs to enhance exports benefitting maximum use of electricity by utilizing the full capacity of the power plants established by the IPPs.

The ideal monetary and fiscal policy framework ensures stable economic growth and development in any country. Monetary policy is used to enhance investment, control inflation, stabilize prices through policy rate and by providing financing or refinancing facilities to industrialists and exporters. Further, depreciation of the Pak rupee is creating problems of cost-push hyper inflation, discouraging investment with no significant improvement in exports, only expecting a slight difference in imports overall and resulting in compromising over the much-needed growth.

Pakistan resorted to the IMF in 2019 for the 22nd time to get support for its worsening economic conditions. The IMF extended support through a loan agreement of $6 billion as part of the Extended Fund Facility (EFF) for its member countries. Conditions were attached with the loan facility such as a hike in energy tariff, removal of subsidies, increase in taxation, privatisation of public entities like PIA, Karachi Steel Mills, DISCOs etc, and fiscal budgetary adjustments. All such conditions tend to create problems for the people in the form of inflationary pressures.

There is an immediate need to arrest inflation and control prices, especially food prices. The monetary policy tools need to be carefully used to stabilize prices, enhance exports, and create an investment atmosphere to ensure growth. Exports need to be enhanced through the promotion of SEZs and diversification of supply chains. Last but not the least, our huge loan portfolio and debt servicing require immediate policy intervention from the government to come up with a better debt management system, as it has all the potential to become a vicious circle, disturbing the economy for all times to come.

The writer is an economist.