Pakistan Tehreek-e-Insaf (PTI) led government is on its way to implement all major prior actions agreed with the IMF that can pave the way for presenting Islamabad’s request before the Fund’s Executive Board for fresh bailout package by January end 2019.
Although, the government does not concede that it was implementing the IMF’s recommended actions, the recent hike in discount rate by 150 basis points which pushed it to double digits from 8.5 to 10 percent, and massive rupee devaluation in a single day, clearly indicate the intentions. These were the conditions placed by the IMF mission last month.
Uncertainty and miscommunication is considered a killer for any economy, and the PTI government is doing both simultaneously. The need is to think over this strategy and make desired changes as early as possible.
For instance, the rupee was allowed to nosedive to Rs144/dollar last Friday, but then it was reversed to below Rs139 in the interbank market. One wonders at the strategy of the State Bank of Pakistan. Why did it allow freefall in the first stage and then intervened to bring it back at below Rs140/dollar. If Rs140 is the desired benchmark, there is no need to create more uncertainty by giving confusing signals.
The fiscal front is the biggest challenge for the PTI government, as fiscal deficit is the mother of all economic ills. How will an IMF programme succeed if the FBR has massive shortfall on a monthly basis?
Although there had been a major reshuffle at FBR, more reforms are needed to fix the problems in the tax machinery. Some more changes are on the cards, but a deeper and much effective strategy is needed on part of the government to expand the narrow tax to GDP ratio.
The FBR is facing a shortfall of around Rs111 billion in the first five months of the current fiscal, which with the existing pace may touch Rs250 billion in the complete fiscal year against the envisaged target of Rs4,398 billion for 2018/19. This is a worrisome development for the country.
The non tax revenue target is also falling short of its desired target. On expenditure side, Pakistan’s major spending revolves around 3 Ds - debt servicing, defence and development – and so far, development seems to be the victim facing the government’s axe. Over 200 development schemes have been abolished to reduce spending from Rs6,000 billion to Rs4,000 billion. There is not much room for cut down on expenditure side.
Current fiscal’s Q1 budget deficit is now 1.4 percent of the GDP against 1.2 percent of GDP in the same period of last fiscal. Keeping historical trends in view, this deficit can be distributed into 40:60 ratios in first and second half of fiscal year. So, if one goes by historical trends, the budget deficit may cross 7.5 percent by end of June 2019. The PTI government needs to take remedial measures without losing any more time.
The economy is heating up, which shows the current governments inability to manage fiscal woes by either cutting down expenditure or increasing revenues. Instead, the government has opted to use monetary exchange rate policies to suppress demand and control the overheating economy.
The PTI argued that the previous PML-N government managed the exchange rate artificially, whereby the central bank intervened and sold $9 billion to keep the rupee stable against greenback in the last two years of its tenure following completion of the IMF programme. The IMF bought this prescription.
This policy of over protection pursued by the PML-N evaporated the foreign exchange reserves. Now Islamabad and IMF have agreed that Pakistan requires real exchange rate instead of the artificially maintained one.
The real exchange rate should be determined on the basis of demand and supply. “Pakistan had pursued flawed exchange rate policy that resulted into evaporation of foreign currency reserves in the range of over $11 billion in last one and half year period,” as per the estimation done by Ministry of Finance, endorsed by the IMF during recently concluded talks in Islamabad.
Under the last IMF programme that ended in November 2016, Pakistan had built up its forex reserves up to $25 billion at one point. However, the reserves declined by $11.3 billion in two years to $13.7 billion till November 22, 2018.
During the recent talks, the IMF mission led by Harald Finger raised questions to ascertain what went wrong with Pakistan’s economy after completion of the last programme despite of the lower international oil prices and improved security situation across the country. “Without having any shocks on international and domestic fronts, why Islamabad’s economy nosedived within a short span of time?” the IMF team questioned.
The Ministry of Finance team argued that the flawed exchange rate policies and reversal of key policies played havoc with the economy, which derailed all the hard-earned macroeconomic gains. They said the loose fiscal policy pressured the external front of the economy, while the overvalued rupee proved disastrous.
When former minister for finance Miftah Ismail was contacted for his comments, he said the PML-N had left the government almost seven months back, and the PTI assumed the reins of power more than three months ago.
“So, instead of blaming all ills on the shoulders of the previous regime, the government must give answers (as to) what they delivered during their tenure.”
He said the economy was running in a much better way compared to now, but the PTI was only indulging in a blame game instead of showing improvements during their tenure.
The writer is a staff member