Ashfaque H Khan
After a decade of economic mis-management and mis-governance by successive governments, Pakistan’s economy has landed in dire straits. By June 2018, Pakistan faced a serious balance of payments challenge with current account deficit reaching an all-time high at almost $20 billion or 6.3 percent of GDP. Budget deficit also remained at elevated level of 6.6 percent of GDP.
Economic growth slowed down to an average of 3.8 percent per annum during the decade (2008-18) which caused unemployment, particularly among the educated youth, to rise. Both public and external debts reached unsustainable level in relation to domestic economic activity and foreign exchange earning capacity, respectively. In short, the present government had inherited an economy which was really in a bad shape.
The government, in its considered opinion, thought it right to knock the door of the IMF 22nd time since its inception and 5th time since the year 2000. The Programme with IMF was agreed in late May 2019 but approved by the IMF Board on July 3, 2019. From agreement to approval, Pakistan implemented the toughest ever prior actions with respect to exchange rate, interest rate and utility (gas, electricity) prices.
The IMF Programme is a 1980s vintage of stabilisation programme which is a demand management, demand destruction or austerity programme. The IMF believes that by destroying demand through various policy instruments, the country can address its balance of payment difficulties. The critical policies of the IMF Programme include floating/flexible exchange rate policy, which invariably leads to devaluation, tight monetary policy through raising discount rate, tight fiscal policy through curtailing expenditure and raising revenue with a view to reducing budget deficit or primary deficit. These policies are supplemented by raising utility (gas, electricity) prices.
Pakistan is in fifth month of the Programme officially but it has been implementing prior actions since September 2018. It has increased discount rate from 6 percent (June 2018) to 13.25 percent (an increase of 7.25 percent), devalued its currency against dollar from Rs.121.54 to Rs.160 (while it has gained back a few rupees as well i.e. from Rs.160 to Rs.156), raised gas prices by 114 percent and electricity prices by 23 percent; it has also set a grossly ambitious revenue target of Rs. 5503 billion with Rs. 735 billion additional tax measures in 2019-20 budget.
All these policies were meant to destroy demand with a view to curtailing imports to address balance of payments difficulties. Pakistan has succeeded in reducing current account deficit by $6.4 billion in 2018-19 and $2.7 billion in the first quarter (July-September) of the current fiscal year. If this trend continues, current account deficit, most probably, will decline to around $7.0 billion in 2019-20. This will be considered as a great achievement of this government.
What the Prime Minister has not been told by his economic team is the wide ranging adverse consequences of the policies that were employed to improve current account balance. The policies, as listed above, have suffocated or chocked the economic activity in the country. It is for this reason that the IMF and the World Bank have estimated a real GDP growth of 2.4 percent in the current fiscal year (2019-20), a growth at par with the country’s population growth rate with serious implications for the people of Pakistan. The real per capita income will register zero growth. In other words, the average living standard of people will remain unchanged but the poor and the middle income people will face severe economic hardships.
Beside suffocating economic activity, higher interest rate has increased interest payment, which in turn, has increased current expenditure and total expenditure. Since revenue did not match the increase in interest payment, it has contributed significantly to the widening of budget deficit in 2018-19 and will do so again in the current fiscal year. Higher budget deficit led to the rise in public debt. The bottom line is that higher discount rate not only chocked the economic activity but also contributed immensely in drowning the country into debt.
The large-scale manufacturing index is continuously on the decline since 2018-19; it has registered a negative growth of 4.6 percent in 2018-19, a negative 3.3 percent in July, 2019 and a negative 7.1 percent in August, 2019. During the first two months (July-August) of the current fiscal year, it has registered a negative growth of 6.0 percent. What is surprising is that the large-scale manufacturing is continuously on the decline for the last 14 months in a row but no one, including the Advisor for Industries, has taken any notice of this. The process of de-industrialization is taking place for quite some time but it has escaped the attention of the relevant Minister or even the Prime Minister.
Excessive devaluation, senseless increase in discount rate, massive increase in gas and electricity prices, heavy taxation and filers vs. non-filers issues are mainly responsible for the persistent decline in the production of the large-scale manufacturing. Sadly, no one has brought this to the notice of the Prime Minister. If this declining trend is not arrested, achieving a growth rate of even 2.4 percent in 2019-20 will become a tall order with all its consequences for unemployment and poverty.
Massive devaluation has failed to increase exports and remittances. Export grew only by 2.4 percent in the first quarter (July – September) of the current fiscal year while remittances registered a negative growth of 1.4 percent. This writer has persistently been saying that in a developing economy like Pakistan, where bulk of industrial inputs are imported, devaluation simply enhances the cost of imported industrial inputs which, along with hike in interest rate and utility prices, makes our industries non-competitive in the international market. Policymakers in the Q Block and SBP are stuck in a textbook solution which may work in industrial/advance economies but not in developing economies like Pakistan. Foreign direct investment has also registered a negative growth of 3.1 percent during the first quarter of the fiscal year. All these facts are not brought to the notice of the Prime Minister by his economic team.
Elements like massive devaluation, unprecedented hike in gas and electricity prices, increase in taxation, and hike in interest rate are responsible for the surge in inflation, which has reached to 11.4 percent in September 2019. Such a price-hike, in the midst of little or no increase in income, has put tremendous pressure on the poor and fixed income middle class. Perhaps this fact has also not been brought to the notice of the Prime Minister by his economic team.
Yes, the economic team has succeeded in reducing the current account deficit but at what cost. The same results could have been achieved at a much lesser cost to which, space does not permit to dwell upon. The people of Pakistan and the Government of the Prime Minister Imran Khan have paid a very heavy cost for reduction in the current account deficit through the 1980s vintage of stabilisation policies.
Now that Pakistan is already in an IMF Programme and the Government has already paid a very heavy price in terms of its popularity, how can the cost be minimized? Here are some of this writer’s recommendations: Firstly, there is a need to reset the IMF Programme; the current Programme with all the targets will cause more harm than good. Revenue, expenditure, budget deficit and primary deficit numbers need to be reviewed with the IMF staff, currently in town. Budget 2019-20 should be made a truly Austerity Budget by linking PSDP (development expenditure) with revenue collection. There is plenty of scope to cut current expenditure for the year 2019-20 as well.
Secondly, revenue target of the FBR needs to be rationalized by taking current level of economic activity into account. FBR tax collection target for the year 2019-20 should be scaled down to Rs 4,400 billion at the maximum, measuring from the last year’s tax collection of Rs 3,764 billion and not Rs 3,829 billion (because it includes one-off tax collection through Asset Declaration Amnesty), it still represents an impressive growth of close to 17 percent.
Thirdly, at the back of inverted yield curve there is an urgent need to reduce discount rate by 100bps in the next monetary policy announcement. As against the discount rate of 13.25 percent, the recent PIBs auction for 3, 5 and 10-year tenors were issued at 11.8%, 11.6% and 11.35% respectively. In other words, the market has already taken into account the reduction of discount rate and the SBP should not surprise the market in the next monetary policy announcement.
Fourthly, the SBP has done excessive devaluation which has caused more harm than good to the economy. Instead of devaluation, there is a need to revalue the currency a bit. The Prime Minister has already alluded to this revaluation.
Fifthly, we must pursue an aggressive manpower export policy to increase the flow of remittances. Saudi Arabia, the UAE, Kuwait, Qatar and Malaysia may be approached at the highest level in this regard. This should be made an agenda item of the Prime Minister’s visit to these countries.
Sixthly, Pakistan has made a remarkable progress in improving its ranking by 28 notch in Ease of Doing Business Index. But much more efforts are needed to bring it at par with our South Asian neighbors for which efforts must continue. Seventhly, we are in the 5th month of the current fiscal year and have not yet floated a single sovereign bond; Pakistan should float at least two sovereign bonds in the current fiscal year, to build foreign exchange reserves. Eighthly, top most priority be accorded to the functioning of at least two Special Economic Zones (SEZs) under the CPEC during the current fiscal year. Pakistan needs to move away from de-industrialization to re-industrialization.
Ninthly, Pakistan needs to create more jobs for which agriculture, livestock and dairy sector, SMEs, housing and construction, hoteling and tourism and IT sector can play important roles. All these sectors are highly labor intensive and have the potential to create enormous jobs. Tenthly, it is absolutely essential for the Prime Minister to interact with the private sector, both at local and foreign, at least once in a month to give them confidence.
Moreover, Karachi is the key to economic revival. It is the country’s growth center, industrial hub, port city, financial center and contributes substantially to the tax revenue. There is a need to pay urgent attention to improving Karachi’s infrastructure and making the city clean and livable. Pakistan’s economic revival depends on addressing Karachi’s problem.
Pakistan is now under the IMF Programme and will remain there for the next three years. The Programme has already inflicted pain and suffering on millions of Pakistanis. This paper has analyzed the Programme, its pain and has given some recommendations to minimize the pains and suffering through job creation. A piece of advice to the economic team is that they should always tell the Prime Minister the whole truth.
(The writer is Principal & Dean at NUST School of Social Sciences & Humanities, Islamabad. Email: [email protected])
