he caretaker government has come up with an economic agenda for Pakistan. The International Monetary Fund has called it “albeit incipient,” “nascent,” and “barely enough.” The $3 billion standby agreement signed by Pakistan and the IMF will ensure that during the given period the balance of payment needs are taken care of, and the danger of a structural default is put off.

Nobody wants civil unrest so soon. The country, however, needs more to get out of the current morass, which is not only economic but also social and political.

A political economy is founded on public confidence in the ability and sustainability of the political system. In a democracy, it is called the government of public representatives. The economy rests on two pillars — fiscal and monetary.

If the monetary pillar buckles under the balance of payment pressure, countries default to external creditors. In the language of the IMF, it is called a structural default. To save these two pillars countries need foreign exchange, usually the US dollars, and the local currency, which is rupee.

To maintain the current payment schedule, Pakistan needs external support to the tune of $9-10 billion every fiscal year. This is a current account deficit of ten billion dollars. The payments can jump considerably with the rise and fall of commodity prices in the international market, particularly the crude oil. This means that trade proceeds and remittances combined are about $10 billion less than the payments the country must make.

The IMF, according to its mandate, saves countries from defaults, so that the contagion does not spread as liquidity crisis to the international system, which may create global trade bottlenecks. In the so-called home-grown agenda, Finance Minister Shamshad Akhtar, has referred mostly to the monetary side, i.e. the measures taken to ensure dollar liquidity and averting external default.

Now the system is liquid for payments, resulting in greater macroeconomic stability. The growth projection for the fiscal year 2024 has improved from 0.3 percent to 2.5 percent. The yield on bonds has risen up by 16 percent and investors have started investing in long-term instruments.

This has been achieved through a mammoth monetary tightening by maintaining a high policy rate. Now the federal government is passing on the Benazir Income Support Programme burden on to the provinces, from the amount transferred to the provinces out of the divisible pool.

Pakistan may once again look forward to going to the international credit market. The time bought through monetary stability, which may provide a cushion to the balance of payments, is a temporary window during which the other pillar needs to be strengthened. So far there has been only demand-side suppression.

The agenda has its costs, recovered almost entirely from the middle class and the small investors. It has brought the fiscal side to a standstill. Inflation is high (although expected now to decline).

The combined effect of the two is a near doubling of the poverty rate. Given the sizable banking spread on top of a high policy rates, the cost of borrowing working capital is around 27 percent.

Given the high cost of energy and very high interest rates, it is hard to produce an exportable surplus at the SME level. Ginners, loom runner weavers, blacksmiths and others have stopped producing.

To maintain the current payment schedule, Pakistan needs external support to the tune of $9-10 billion every fiscal year. The payments can jump with the rise and fall of commodity prices.

As a nation we have been generating less revenue than our spending and borrowing the rest. If the cost of borrowing is less than the return on a progressive asset created using it, the borrowing is worth it. The case is different here. Three fourths of the federal revenues raised as taxes is funneled to withstand debt-servicing, not debt repayment.

The country is forced to borrow more. The international financial support is being given like an antibiotic. It may cure the ailment (poor governance) and allow the fiscal side to take hold as a permanent solution. The ability of the patient may have been compromised but the money supply should be continuous and incremental.

Ultimately, Pakistan needs to generate more taxes, to the tune of Rs 2.5 trillion for a humble start. There is a need to recover direct taxes from new taxpayers, or from those who have not been paying their equitable share: from traders and retailers and from those who have parked properties in real estate and incomes from the rent market.

Simultaneously, the interest rate should be revised downwards, at least by 5 percent. This may give a spurt of additional 2-3 percent growth, bringing the overall growth to about 5 percent. For that Pakistan needs a new IMF programme that allows a one-time supply side injection, with a mandatory and rigorous governance supervision package. This package should be negotiated by the new government with a fresh mandate.

The World Bank in its publication, Reforms for a Brighter Future, has explained rigorous governance in eight points:

1) Pakistan should move from beyond low equilibrium exclusive growth to inclusive growth.

2) It should move from underfunded, inefficient and fragmented service delivery and social protection systems to well-coordinated, efficient and adequately financed service delivery, available to the marginalised.

3) From wasteful and rigid expenditure financed by high levels of debt and a narrow, distortive and inequitable tax system, it should move towards prioritised public investments that support growth and development, financed by a broad-based, efficient and equitable tax system.

4) From a protected, stagnant and low-productivity economy with a large state presence it should move to a dynamic, open economy driven by private investment and exports.

5) From agriculture sector policy settings that lock farmers into a low-value, low-productivity farming system, it should transition towards a market-driven, productive agricultural system that is resilient to climate change impacts.

6) From energy sector policies that drive high energy costs, environmental harm and unsustainable accumulation of debt, it should move to efficient, sustainable and resilient generation and distribution, based on accurate price signals and strengthened private participation.

7) It should move away from a public-sector that is inefficient, often ineffective and vulnerable to capture by vested interests.

8) It should move towards an accountable, efficient and transparent government.

The prescription has to be taken with a pinch of salt. It may boil down to what Yuval Noah Harari has called subjective reality, having an inertia of its own, which may make any mid-course correction difficult.

The writer is a researcher based in Islamabad. He tweets @tahirdhindsa. He can be reached at tahirdhindsa@gmail.com