Tough tasks ahead

The government has finally named a full-time governor to the State Bank of Pakistan (SBP). A career central banker with vast experience at home and abroad, Jameel Ahmed is prime facie a consensus candidate in a coalition government, reflecting convergence on matters of economic management. Governor Ahmed has a good working equation with Finance Minister Miftah Ismail, and should be able to share his vision, bringing a healthy dose of cohesion to macroeconomic management. Equally important, his appointment marks a departure from an undue emphasis on connections with international financial institutions for appointees to this vital office. Here’s hoping Governor Ahmed is able to hit the ground running, because he has no time to lose given the situation of our beleaguered economy. He has to put the brakes on inflation and bring it down to manageable levels. It will be interesting to see what fiscal or monetary tools he decides to employ, because the task on hand is by no means simple. There is no straightforward way to shield the domestic economy from imported inflation, especially given its addiction to imported fossil fuels, expected to trade at inflated prices in the foreseeable future.

Another challenge will be to build the country’s foreign exchange reserves to a respectable level, right now teetering alarmingly low at around $8.7 billion. The task promises to be uphill all the way given that we are projecting to fork out around $22 billion in foreign debt service and suffer a current account deficit to the tune of $12 billion over the current fiscal year. Workers’ remittances and proceeds from exports – the only inflows we expect – will be nowhere near enough to offset these mammoth outflows, leaving the authorities to bridge the gap through borrowing from the IMF and bilateral lenders. The new SBP governor will also be concerned with maintaining sanity in the rupee’s exchange rate parity. With central bank interventions out of the question for obvious reasons, the only recourse left will be the policy rate. But any policy rate hike will inevitably have an adverse impact on growth, with the threat of recession always looming. The situation is further aggravated by a high-inflation-low-growth combination manifest in all major economies, verging on stagflation and threatening to devolve into a global recession at any time.

As if the situation was not already complicated enough, there is a further layer of complexity added by the checks and balances brought to the equation by the IMF-chaperoned reform programme Pakistan’s economy is strapped with. Any deviation from those strict dos and don’ts will potentially derail the bailout, necessitating even harsher conditions down the line. This will necessitate indirect approaches and circuitous tactics in many areas. Take, for example, the recent lifting of curbs imposed by the government on luxury goods – at a time when the country needs to stop bleeding foreign exchange. Thankfully, the impact of lifting these curbs is expected to be minimal given that the authorities intend to raise some tax barriers to dampen the outflows. This is nevertheless a demonstration of how the economic managers will have to jump through all kinds of hoops to keep policies on track.

Finally, Governor Ahmed is taking the reins of the central bank at a time when the government is preparing to institute fresh revenue measures by imposing new taxes. The move has been necessitated by an early departure from the budgeted revenue measures by withdrawing a small fixed tax on the retail sector. The jury is still out on the wisdom of this step backwards, and it remains to be seen if the government can make it right through new taxation measures. If they materialize in the shape of a tax on cigarettes and tobacco leaf, the government may be able to recoup the lost revenue without much of a public uproar or damage to the economy. The bottom line is that there is no autopilot for the economy. Minister Ismail and Governor Ahmed will do well to work in close coordination to maintain a semblance of normalcy at a time when nothing is normal either domestically or globally.