Clear and present threat

It is time for a brisk, upright and orthodox approach to some of Pakistan’s immediate but huge challenges. Low reserves of the State Bank of Pakistan (SBP) at $10.088 billion, untenable subsides of energy at Rs143 billion a month, high trade gap of $40 billion in 10MFY22 and a 24-month high inflation recorded at 13.4 percent in April 2022 are clear and present threats. All of these should be taken seriously. One has always advocated looking beyond the immediate. Doing more than fire-fighting and developing a sustainable growth vision for the economy – but today is not the time for such an analysis.

It is common global practice for an election victor to hit out at the defeated opponent and lay the blame for all the country’s ills. Keeping in that spirit, the new government in Pakistan is not holding back, especially since political temperatures remain high. Accusations of skulduggery are hotly contested by all political parties. Cloaked in the legitimacy of a constitutionally held change, the new government must think beyond this frame of mind. Today is not the time for blame games. It is the time to fix the immediate disequilibrium in the economy. It is time to ensure a soft landing of the economy.

Today, with international economic storm clouds building in the US, Europe and China, some economic observers believe that 2022 is indeed a tough year to hold government. Global forces are beyond the control of any country. Pakistan is no different. International uncertainty and events should play down expectations of any quick fixes on inflation and the resultant interest rate rises. It may be helpful for the government to build the right narrative and form policies around the narrative.

Domestic economic facts clearly show that Pakistan’s economy needs a bit of cooling off. We must remember that not all economic pressures are not exogenous driven. Price pressures and the needed policy rate changes carried by the SBP are partly due to an expansionary fiscal stance. Data for 9MFY22 highlights that the primary deficit is at 0.7 per cent of GDP. This is a reversal from the primary surplus 0.8 per cent of GDP achieved during the same period last year. Higher energy subsidies, increased non-interest expenditures and grants have all contributed to the expansionary fiscal stance. This has led to a higher demand in the economy which, combined with global commodity prices running well ahead of forecasts, has resulted in a higher import bill as well as rising Consumer Price Inflation in Pakistan. The impact of policy mis-calibrations is rather obvious.

Pakistan’s current challenges are thus both global and domestic and won’t be fixed just by a slow reacting set of policies. Only a relatively serious and nip-in-the-bud stance can make sure Pakistan passes unscarred. At this time, successful policymakers will be those who can be blunt, frank and upfront to engineer a soft landing from serious immediate risks to the economy.

The government needs to put forward some economic policy – one with timelines spanning the next six months and clear quantitative analysis. We need to be able to unambiguously answer the following queries. How are the SBP foreign exchange reserves expected to rise? How will energy subsidies fade? How will a rising inflation subside? How can the budget rein in the rising deficit? How will the programme with the International Monetary Fund proceed? These are difficult questions but answering them in the immediate will ensure external solvency for Pakistan. It can give some confidence to domestic and global bond markets that sane voices have prevailed.

SBP Foreign Exchange Reserves: Let us address the above queries one by one to make the job of the government a little easier. Query one needs immediate roll-over of Chinese loan of $2.3 billion unnecessarily delayed for two months. Additionally we need to fast-track project financing and prepare for program financing with multilaterals. Commercial financing and telecom auction yielding $300-$500 million can be fast-tracked. A public plan rather than scattered announcements would help. Just to understand the seriousness of the external side, SBP net international reserves, reserves net of liabilities and repayments over the next twelve months are estimated to be substantially negative.

The above is one side of the balance sheet. The other side is simply saving dollars. This requires an energy conservation plan. Today the government can save by a plan that ensures an engineered demand destruction. The principle is simple: energy saved is foreign exchange saved. More can be done for energy conservation by setting minimum energy performance standards, energy performance labelling schemes and energy audits. Lets’ get cracking.

Subsidies: Energy pricing is indeed a tough area but inaction will lead to an economic meltdown. The idea is pretty simple; the instruments can be different. Pass through petroleum prices to consumers with targeted subsidies to two and three wheelers, public transport and agriculture. Across-the-board subsidies are widening both deficits as elaborated above. The current change in prices is too little for a meaningful impact.

Inflation: The inflation genie is out of the bottle. However, what the government can do is clear. Careful coordination of monetary and fiscal policies is required for both to pull in tandem. In addition, managing the supply of commodities and cheaper fuels, improving the performance of competitive markets rather than administrative actions, ensuring that there is no undervaluation of the rupee, and limiting the rate of monetary expansion to a low double-digit rate will all help. There is also a need to send a clear message to all political leaders that the cupboard is bare, so don’t expect more money in Budget 2023. With high inflation, more spending simply adds fuel to the fire while increasing debt.

Budget: A challenge for Budget 2023 will be to rein in wasteful spending and the structural budget deficits forecast to a reasonable level around six per cent of GDP over the next few years. Moreover, the government’s ‘line-by-line’ budget audit can cut deep into unproductive spending. Productivity growth is chronically weak, hampering real wage growth. Budget needs to review concessions to upper middle-income groups hovering at more than a trillion rupees annually. We look for a Budget Strategy Paper to give credence to the fact that we are on top of things.

IMF: The reason we keep the IMF query in the end is the following. For Pakistan, today it is more about doing its own homework on identifying a set of policies as highlighted above. Once we are clear on our direction, IMF resumption would become much simpler as the above policies can form part of the Memorandum of Economic and Financial Policies to be agreed with the Fund – that’s what really counts.

Let’s be clear of what is required of us: avoid immediate external payments crisis or a debt default without making the less fortunate pay for it. Place the burden of inflation, expenditure cuts and new taxation measures focused only on the well-off rather than the vulnerable. All real hard work.

The writer is former adviser,

Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at:

khaqanhnajeeb@gmail.com