Financial mess

INSIGHT

The caretaker government led by Prime Minister Justice (retd) Nasirul Mulk has sworn in after taking oath and assumed powers with the mandate to hold free and fair elections in the country within the stipulated timeframe of two months. The caretaker cabinet is expected to assume its charge this week. The incoming finance minister will have to ensure a smooth transition on the economic front. This will help avert any blown out crisis-like situation during the tenure of the caretaker setup, so that smooth and timely transition of power can happen. This will be the second transfer of power to an elected government in Pakistan.

There are many things that the caretaker government and political parties contesting elections will have to ensure on the political as well as the economic front to ensure that the masses get to vote for their representatives. First and foremost being the end of uncertainty.

Any effort to delay elections may further aggravate the economic crisis because multilateral creditors like the International Monetary Fund (IMF), World Bank and the Asian Development Bank may show reluctance to work with any transitional government. The creditors may not be keen to dole out a much needed bailout package to remove external sector woes if an elected government is not in place.

While there is no doubt any more that Pakistan will have to knock at the door of the IMF again with a begging bowl, the political parties must come forward with some home grown reform, agendas of their own.

The agendas must be undertaken with the support of the IMF, so when the party assumes power after getting the mandate of the masses, it can roll up its sleeves and get to business. Merely relying on sloganeering and strong claims that Pakistan will not opt to go back to the IMF can no longer be relied on.

If the elections are held on time, the elected prime minister’s first meeting might be with the fund officials.

The caretaker finance minister must remain vigilant and not consider this stint a bed of roses. The finance minister will have to decide, as soon as assuming power in the caretaker setup, to either retain the existing economic team till the last month of the outgoing fiscal year 2017/18 or to bring in new faces at the ministry to control matters.

Although, the existing finance team led by Finance Secretary Arif Ahmed Khan is struggling to fix financial mess, the caretaker finance minister must review in detail and then analyse the real situation. The analysis is especially important as far as the twin deficits - the ever increasing budget deficit and current account deficit – are concerned.

A thorough analysis will enable the incoming finance minister too to either post out the existing team at the Finance Ministry and the Federal Board of Revenue or to continue with them for at least a month if they are found helpful in delivering on three major fronts of the economy.

Controlling the yawning budget deficit, which might have crossed 5 percent to 5.5 percent of gross domestic product (GDP) in the first eleven months would be one of the first and foremost challenge for the upcoming finance minister. The budget deficit is likely to reach 6.5 percent to 7 percent of GDP till the end of June 2018, despite taking circular debt out of the official books. Moreover, the likelihood of provinces having left anything in their kitty to generate revenue surplus to the tune of one percent of the GDP is also highly improbable.

The federal government will have no option but to deduct the desired amount from their share, before transferring to the provinces in the last month, if it wants to avoid touching eight percent deficit for the outgoing fiscal year.

A reality check is much needed. Instead of hiding the mess under the carpet, the incoming finance minister must first analyse the situation and then undertake all required steps to help the country avoid further ballooning of the budget deficit. The caretaker government will have to take many tough decisions.

A major decision among those would be increasing the prices of petroleum products, as no other option is left on the fiscal side of the economy.

The Pakistan Muslim League-Nawaz (PML-N) regime as well as provincial governments, before relieving powers, splurged money and maximised their dole outs and incentives to lure voters in view of the next general elections. The frequent issuances of cheques, provision of Rs31 billion refunds and many other incentives damaged the country’s fiscal discipline. Now, it will be the unpleasant responsibility of the caretaker government to clean the house as much as possible before handing it over to the elected government within a two months period.

By slashing down the budget deficit, the caretaker government can suppress demands for imports, though time is very short and the task enormous, they will have to take steps to avoid the eruption of a major crisis.

It is not an option to sit idle and wait for the monster to come and swallow everything. The foreign currency reserves are depleting at supersonic speed, so the incoming finance minister will have to rush to do something to ensure dollar inflows in the range of $2 to $4 billion on immediate basis. The foreign exchange reserves have continued to decline in the range of over $250 to $300 million on weekly basis during the last two months. If this pace continues in the coming month without receiving any major injection of dollars, then it will be difficult to stop run out for dollarisation of the economy and exchange rate may come under immense pressures.

The due repayments as well as rising imports bill cannot sustain with this meagre foreign currency reserves position. The current account deficit crossed $14 billion for first ten months of the current fiscal year and many independent economists are projecting it in the range of $17 to $18 billion for the whole fiscal year 2017/18.

With this kind of surge in the current account deficit, the finance minister will have to raise alarm bells, so that the incoming finance minister scheduled to assume charge this week, can device an effective strategy on short-term basis. Otherwise, the crisis might aggravate in a few weeks, exactly at the time when the country will be passing through the next general elections.

The writer is a staff member