he first official statement of Prime Minister Shahbaz Sharif on national economy strikes a familiar chord: “The country is drowning in debt, but we have to take the boat to the shore... We have to overcome the challenges of poverty, unemployment and inflation. The previous government failed miserably in its fight against these hardships.”

Sharif’s assertion that Imran Khan’s economic policies were an unmitigated disaster, may only be a half-truth. Blaming Khan for all the country’s economic woes is dangerous because it might blind one to the fact that Khan inherited several structural problems from the PML-N government just as the PML-N government had inherited many economic problems from the PPP and the Musharraf eras.

Now that a new government has been installed, the challenge is to take stock of problems objectively and look for a way forward. Here we discuss what went wrong with Imran Khan’s economic policies, the challenges for the government and how best to manage the economy.

Imran Khan inherited several complex economic problems. The situation worsened significantly on his watch. Khan’s failure lay fundamentally in the failure of his economic managers to comprehend, let alone address, the macroeconomic challenges. The PTI government inherited the currency crisis but had no effective plan to check the free fall of the rupee against the dollar. The focus under the PTI government was on using familiar shortcuts: opening capital accounts for speculative portfolio investment, encouraging unproductive real estate investment and subsidising an elite-favoring rentier economy.

Foreign investment comes in many different shades and hues, with different economic implications. For example, a long-term foreign investment in the manufacturing sector has a different effect on the economic fundamentals than heavy investment in the debt and equity markets. A country needs to ensure a stable political environment, reliable law and order situation, predictability and continuity of economic policies and regime changes to attract long-term investment in the manufacturing sector.

On the other hand, attracting foreign investment in the debt and equity market requires little more than tweaking the policy rates. When the going got tough for the PTI government, Pakistan followed the latter policy. Among other factors that explained a pouring in of “hot money” (short-term foreign investment in the capital markets), hiking the policy rate above 13 percent by the central bank in 2019 was a significant factor. It resulted in $4.1 billion in foreign investment in debt and equity markets, with a significant chunk going into T-bills (often close to 50 percent of the total portfolio investment).

Khan also inherited a deep structural problem of low investment rates, which essentially means preferring consumption now at the expense of future growth. Pakistan invests around 15 percent of its output, which is starkly inadequate and low even by regional standards. Other South Asian economies invest around 30 percent of their output. A direct consequence of Pakistan’s historically low investment rate is that its economic productivity has remained at a sub-optimal level leaving it a limited space for innovation and diversification of its product mix. In a recent article appearing in the New York Times, Atif Mian noted that Pakistan’s total export volume remains at the 2005 levels.

Imran Khan inherited complex economic problems. Under him, the situation worsened significantly. His failure lay fundamentally in the failure of his economic managers to comprehend, let alone address, the macroeconomic challenges.

With double digits inflation and unemployment rates at all times high during the early phase of Covid-19, the PTI government was under immense pressure to provide quick relief to the masses. With limited fiscal space and near absence of a team of expert economic managers to set the economic fundamentals right, the PTI government chose the quick-fix approach of giving subsidies under its Ehsaas programme. However, the subsidies that invited the IMF’s ire were more recent (announced in February this year) and related to fuel prices and power tariffs.

Other economic problems that haunted the PTI government were the massive devaluation of the rupee and the huge debt burden. The rupee devaluation under the PTI regime was unprecedented in Pakistan’s history. The PTI government also added around $27 billion to the external debt, a lot more than the PML-N government.

When economic fundamentals are weak, the currency is always likely to be under pressure. But during the PTI government, the rupee witnessed unpreceded episodes of devaluation. As Pakistan’s oil and food import bills surged the steady increase in the import bill triggered an unprecedented trade deficit, further eroding the value of the rupee. The most recent decline was triggered by an uncertain political situation and a stalled IMF programme.

Governments turn to the IMF only when they cannot sort out their economic problems themselves. IMF programs are often painful for the masses and extract a heavy political toll.

The situation now is that the IMF has set a number of preconditions to revive its Extended Fund Facility. The Sharif government has been asked among other things to ratchet up fuel and utility prices, do away with tax amnesty schemes for industries, reduce circular debt and show progress on the fiscal front. In particular, it must reverse the February 28 relief package to receive the next loan instalment.

Finance Minister Miftah Ismail recently visited Washington to renegotiate the EFF. The IMF has reportedly agreed in principle to enhance the current EFF from $6 billion to $8 billion and extend it for another year to help Pakistan sort out the issues with its balance of payments and foreign exchange reserves. A formal decision in this regard will be contingent on the success of technical talks that are in progress at the moment. It seems that the IMF will not budge from its demand for withdrawal of subsidies announced by the PTI government.

The government is currently paying a subsidy of Rs 21 per litre on petrol, Rs 51.52 on diesel and Rs 5 per unit of electricity. The finance minister has hinted that the government will gradually phase out the subsidies. Making it palatable will be a big challenge.

Pakistan’s economy is in dire straits because of a combination of factors, including Covid-19 and the erratic economic policies of the PTI government. The ordinary people have been hit by sky-rocketing commodity prices. Bringing them relief will be a big challenge for the government, but the most crucial challenge will be setting the fundamentals rights. An economic course correction will require balancing long-term economic recovery and providing relief to the most deprived in the short term. This is easier said than done.

The current regime’s job is likely to become intractable because there does not seem to be any let-up in the inflationary trends. According to FAO predictions, global food prices will reach an unprecedentedly high level this summer. This will further ratchet up food prices in Pakistan and threaten food security. It is almost a truism that threats to food security and social unrest go hand in hand.

An equally virulent challenge for the government lies elsewhere. Playing the religious and nationalistic cards adroitly and his calling for fresh elections, Imran Khan will leave the government little space to take the tough decisions necessary for economic recovery.

The writer is an associate professor in the Department of Economics at COMSATS University Islamabad, Lahore Campus