The Chief of Army Staff, General Qamar Bajwa, speaking at a seminar organised by the Institute of Strategic Studies, Research and Analysis held at National Defence University, came out strongly in support of the government’s economic policies that are sourced to the implementation of four ‘prior conditions’ agreed in the 12 May staff-level agreement with the International Monetary Fund (IMF). Support by the armed forces (widely regarded as a neutral umpire accounting for their inclusion in all matters of national importance including in Joint Investigation Teams in issues relating to corruption as well as their role in supervising elections) was indeed very timely for the new economic team as the four prior conditions gave rise to considerable criticism.
The first prior condition is the adoption of a market-based exchange rate system. On Friday 10 May, before the agreement was reached, the interbank rupee-dollar parity was at 141.39 (bid) and 141.40 (offer). By June 28 the rate was 159 rupees (bid) and 160.25 (offer) which declined from the previous day’s rate of 164 rupees to the dollar (bid) and 164.25 (offer) subsequent to two meetings between the Prime Minister and the Governor of State Bank of Pakistan. While we hold no brief for the then Finance Minister Ishaq Dar’s flawed policy to keep the rupee overvalued that made imports more attractive and exports unable to compete internationally, yet we must emphasise that rupee erosion at such an alarming rate in so short a period would have serious implications on pricing of another major inputs for industrial and agricultural sectors – power. Energy (electricity, gas and POL) tariffs are determined in cents (US) and even the subsidised rate at which gas is supplied to five major exporting industries in Punjab is 7.5 cents with the objective of equating costs of Punjab industry to their counterparts in Sindh, a gas producing province, where gas is cheap. Needless to add, with the large-scale manufacturing (LSM) registered negative 2 percent growth, a major contributor to growth, exports, employment and taxes, the optimistic budgetary projections would have to be revised downward.
Transport costs are on the rise as petroleum and products are imported and any rupee-dollar fluctuation is passed onto consumers in its entirety; however the Saudi 3.2 billion dollars deferred oil facility for three years may provide some necessary support to the balance of payment position with exports expected not to pick up due to rising input costs as well as failure of successive governments to produce to export rather than exporting our surplus.
And finally, the erosion of the rupee also compromises the capacity of the local industry to actually compete with smuggled items that are freely available in our local markets given the thousands of miles of our porous borders with neighbouring countries.
A better and needless to add a more palatable option from the perspective of general acceptability of the market-based exchange rate would have been to agree to a prior condition of 10 rupee to the dollar in the first month and thenceforth a much slower pace (up to 12 months) of implementation of the market-based exchange rate.
Second, the discount rate was raised as a means to reduce aggregate demand and thereby reduce inflationary pressures. Consumer products on credit is not the usual practice in this country and hence raising discount rates has rarely dampened consumption significantly though it does dampen credit by the productive sectors with obvious implications on the rate of GDP growth. There is a perception that the prior condition of raising the discount rate to the agreed level has not yet been achieved and there is speculation that the rate would be raised by another 1.5 to 2 percentage points. We would recommend a more phased approach to this policy as well.
Third, the government made it mandatory for all its ministries, departments, divisions as well as autonomous bodies to deposit funds in the federal consolidated fund or a single treasury account, a measure that we fully support, however, care must be taken that Pakistan, with corruption levels comparable to Nigeria, does not go the route set by an oil producing African country where charges of corruption were levelled against an e-collection agency receiving a commission.
And finally, the 0.6 percent primary deficit agreed as a prior condition by the government is not likely to be achieved unless there is a massive revision of budget documents that would take the rupee-dollar parity as on the last day of June rather than as 150 rupee to the dollar as the basis for projections.
At present, criticism is being spearheaded by the opposition, who the treasury benches ridiculed, booed and dismissed during the budget debate while dismissing all their cut motions. Notwithstanding corruption charges against the leadership of the two main opposition parties, the government must surely be aware that they represent large swathes of support throughout the country with Pakistan People’s Party commanding an overwhelming majority in the Sindh Assembly while Pakistan Muslim League-Nawaz won more seats in the Punjab Assembly than the Pakistan Tehreek-e-Insaaf (PTI) and is in government in Azad Jammu and Kashmir. And PTI coalition has a slim majority, under 10 members, in the National Assembly.
The capacity of the people of this country to further withstand the continuation of the expected negative outfall of these four prior conditions, (leave alone the ones that the government may have agreed to once the IMF loan is approved by the IMF Board) is likely to be severely tested in months if not weeks to come. Support by all institutions is unlikely to deter those pushed under the poverty line, lower middle class as well as the newly-unemployed, to heed advice for patience.
So what is the solution? For starters we need to take account of our ground realities including massive smuggling and the expected inflows of Chinese investment in months and years to come under the China Pakistan Economic Corridor (CPEC). The linkage between discount rate and credit is fairly well-established but between discount rate and aggregate demand is not that well-established in this country. Therefore, the agreement with the IMF to reduce the primary deficit from nearly 2 percent to 0.6 percent in one year is simply unrealistic as is the revenue requirements handed out to the Federal Board of Revenue.
To conclude, failure to recommend or focus on any homegrown remedies during negotiations with the IMF smacks either of being convinced that the way forward is the IMF or the highway or simply the new economic team not having enough time once they were installed in their positions to first study and then propose innovative remedies. One would hope that there is a Plan B under consideration or preparation – not a political Plan B but an economic Plan B.
