The International Monetary Fund (IMF) has expressed its grave concerns over the state of country’s economy because of “weakening macroeconomic situation, decline in foreign exchange reserves and increased risks to Pakistan’s economic and financial outlook and its medium-term debt sustainability.” This newspaper has been urging the government for the past three years to revisit flawed policies that would, in time, result in weaknesses in key macroeconomic indicators, a concern proved valid given the release of data for the past year and a half.
To date, there appears to be no attempt to revisit these flawed policies. The only exception has been the government’s decision to depreciate the rupee in December 2017, with the objective of supporting the export sector – a decision taken subsequent to the IMF post-programme mission leading to speculation that the decision was taken after consultations with the mission. The rupee however remains overvalued prompting the Board of Directors to stress “the importance of greater exchange rate flexibility on a more permanent basis to preserve external buffers and improve competitiveness.”
Depreciation in December accounted for a marginal rise in exports; however, unfortunately it has been unable to check the rise in imports leading to a widening trade deficit. Remittances have been unable to meet the rising trade gap leading to a widening current account deficit. The Abbasi-led administration has relied on borrowing, in line with the policy of the Sharif-led administration, to meet its current account deficit and is grappling with multilaterals/bilaterals unwilling to extend programme (budget support) loans as their comfort level that the government would implement the necessary reforms has eroded after the Fund programme ended in September 2016, leaving it with no leverage to insist on time bound structural reforms. Support is also waning as Pakistan is effectively on the grey list of the Financial Action Task Force (FATF), as stated by the Advisor to the Prime Minister on Finance, Revenue and Economic Affairs, Miftah Ismail, and therefore there is added reluctance to extend support.
The government’s attempt to incur higher debt equity through issuance of Eurobonds/sukuk was reportedly vetoed by Prime Minister Shahid Khaqan Abbasi on grounds that the rate of interest would be higher than 7 percent rather than what was envisaged – a reflection no doubt of multiple factors, including the state of economy, the FATF decision and last but not least the impending general elections. This accounts for the ever-rising reliance on domestic debt which has increased to over 16 trillion rupees. No wonder the IMF noted that there is a risk to our medium-term debt sustainability.
The only favourable element in the IMF report was the contention that our Gross Domestic Product (GDP) would rise by 5.6 percent in the current year – downgraded from the budgeted 6 percent. However, the World Bank and Asian Development Bank have projected 5.5 percent for the current year and it is unclear why the Fund has projected a rate higher by 0.1. Be that as it may, Miftah Ismail cited this rate as indicative of the Fund’s support for the state of the economy, a contention that is political in nature and unfortunate as it may be used to justify the continuation of the flawed policies for the remaining three months of the incumbent government’s tenure. While three months is not a long time to make too much of a difference on the state of the economy yet the next three months will be critical as not only would the budget be prepared by the PML-N, which would be implemented by the Caretakers for as long as they form the government, but the FATF is scheduled to evaluate the implementation of our strategy in June 2018 when the Caretakers would be in control.
Business Recorder would suggest, in the larger national interest, that PML-N interacts with all political parties in relation to these weighty matters on an emergent basis; however this appears unlikely with the existing rise in temperatures between the three major national parties today.
