No time to waste

Prime Minister Imran Khan-led Pakistan Tehreek-e-Insaf (PTI) regime has inherited the country’s national economy with rising twin deficits, including the current account deficit and budget deficit. In absolute terms, these had never been witnessed at such a peak in the country’s over 70 years history.

The budget deficit touched Rs2,260 billion or 6.6 percent of gross domestic product (GDP). There is need to analyse what happened to the fiscal position. The budget deficit stood at Rs796 billion or 2.2 percent of the GDP in the first half (July-December) period of the last fiscal year. However, it rose sharply to 6.6 percent of the GDP in the remaining last six months of fiscal year 2017/18.

What kind of fiscal management was adopted by former finance minister Miftah Ismail that resulted into devastating the impact for the economy? Further, adding salt to the injury, the last Miftah Ismail-led regime had doled out tax incentives by jacking up taxable income ceiling from Rs0.4 million to Rs1.2 million, and reducing the maximum rate from 30 to 15 percent.

This one step had literally excluded 1.2 million taxpayers from the already small tax base of 1.4 million in Pakistan. The current account deficit on the other hand went up to $18 billion, putting pressure on foreign exchange reserves that sharply depleted to below $10 billion. If swaps, deposits and future contracts are taken into account, the net foreign currency reserves stood at not more than $1.5 billion.

In the presence of such a difficult economic scenario, the PTI-led regime won July 25, 2018 elections and raised lofty expectations up to unprecedented levels. They promised the masses of providing millions of jobs, construction of housing units, and many other things. Now, they will have to manage expectations on one side and deliver to fix the economy as early as possible on the other side.

Sadly however, the PTI so far remains unable to come up with policy prescriptions on the economic front. The Atif Mian fiasco on the Economic Advisory Council (EAC) has resulted into the weakening of the PTI position, as some other members have started tendering resignation in support of him.

Few weeks have already passed, but Minister for Finance Asad Umar and his team have not come up with any policy decision on the economic front.

He must have started receiving briefings after winning July 25 elections, because when fire catches any building, the procedural requirements can be kept aside for the larger interest. If he had started his homework at that time, he would be in a position to come up with corrective measures. One needs to understand that delayed action would escalate the cost, which the people of Pakistan had to bear at the expense of their bread and butter.

Also, the Ministry of Finance was currently running without having any spokesman in its fold. It is necessary for the ministry to communicate with journalists, especially in the absence of a persistent policy which has given rise to speculations.

Although, the Minister for Finance Asad Umar must be definitely busy after assuming charge of finance, revenues and economic affairs, he must spare some time to appoint any suitable officer - having full knowledge about the economy - who could give satisfactory replies to the journalists on different questions.

There is need to devise a roadmap to fix the economy at internal and external fronts without wasting a minute. First of all, the government needs to come up with the exact gross financing requirements on the external front of the economy.

On short-term basis, the government will have to take more steps on fiscal, monetary, and exchange rate fronts to suppress the demand side for discouraging imports. The government will have to analyse as to why the additional custom duty and regulatory duty had failed to yield the desired results.

It has been pointed out that it was happening because of the free trade agreement (FTA) with China. When the government took fiscal measures to discourage imports, it actually benefited Chinese imports more. It happened because the cost of products from other countries became dearer, while Chinese imports became cheaper. So, trade deficit with China increased manifold in recent years.

Now, the government needs to analyse and tighten the fiscal and monetary policy, and exchange rate. Once that happens, the government can then take further steps to discourage imports. On medium- and long-term basis, the need is to come up with plans to boost exports by reducing cost of doing business and simplifying procedures. The government will have to resolve problems of stuck up tax refunds in order to remove liquidity crunch being faced by the exporters.

The government plans to raise $3 billion through international sovereign eurobond and Sukuk bond during the current fiscal year. In addition, the government was also planning to come up with Pakistani diaspora bond in order to lure investments from non-resident Pakistanis. It can help generate up to $1 billion to $2 billion.

The government will have to repay foreign loans in the range of $8 billion in shape of principle and mark-up in the current fiscal year. To ascertain the exact financing requirement on the external front is an important task for the economic managers, because it will determine the exact gap, after which the government will be able to devise a strategy to fill this gap.

The gap on the external front has been estimated at $12 billion at least. So, the government has to manage these dollar inflows.

China provided $2 billion as SAFE deposits in July 2018, that helped Islamabad stabilise its foreign exchange at the existing levels. However, that breathing space is depleting fast, and the PTI-led government does not have much time on its hands. They have to come up with policy level decisions very soon.

In case the government delays the taking of corrective measures in the next three to four weeks, another run up on exchange rate cannot be ruled out.

Therefore, the government should so some urgency in fixing the economy, or else the difficulties will mount manifolds in the weeks ahead.

With the International Monetary Fund (IMF) or without it, there are some remedial measures required to fix the economy on short-, medium- and long-term basis. The problems have been rising because the PTI has so far been unable to come up with any policy on the economic front, which should be a cause of concern for everyone.

Former finance minister and renowned economist Dr Hafiz A Pasha had suggested the government to approach the IMF at the earliest, and if Islamabad found that the IMF was getting dictation from Uncle Sam, the government could have explored other options.

However, if the other options get exhausted first, then it would become problematic to approach the IMF at the time of eruption of a full-fledged crisis. With no room to fall back, the IMF might rope in the toughest conditions for providing a bailout package to Islamabad.

The PTI has no time to waste and must come up with policy decisions to end the rampant confusion.

The writer is a staff member