Window-dressing the economic front to furnish it with an all-is-well façade is not going to work as no matter how thick the layers of this put-on may be, it starts coming off as soon as the first showers of ‘rainy days’ hits it.
Given the gravity of the situation, only aggressively carried out tough structural reforms, aimed at bringing about ground-breaking long-term changes for the better, can guide the country out of this neck of woods.
However, it’s becoming a challenge for the Pakistan Tehreek-e-Insaf- (PTI) led government to take difficult decision, while their confusing signals as well as half-hearted attitude are bound to exasperate the economic situation in months and years ahead.
The challenging situation on internal and external accounts has touched new peaks and it now cannot be tackled with status quo approach anymore. First look at internal account of the economy.
The federal government’s total revenues per annum stand at Rs5.5 trillion, including Rs4.4 trillion generated by the Federal Board of Revenue (FBR) and non-tax revenues to the tune of over Rs1 trillion. Keeping in view resource distribution formula through federal divisible pool (FDP) under National Finance Commission (NFC) Award, the provincial and federal governments share in FDP stands at 42.5 percent and 57.5 percent respectively.
This financial year, the provinces are expected to get Rs2.5 trillion so the federal government will be left with only Rs3 trillion in its kitty. On expenditure side, the federal budget revolves around three ‘Ds’ including debt servicing, defense, and lastly development. Two other major heads of expenditures are running of government affairs and subsidies.
Alone the debt servicing and defense is projected to consume Rs3.6 trillion during the current fiscal year thus it becomes crystal clear that the center is forced to start its budget from negative Rs600 billion from day one. In this context, there is no other choice but to borrow from internal and external avenues to meet obligatory expenditures such as running of the government for providing salaries, pensions and undertaking development work for construction of roads, hospital and other safety nets.
The subsidies head consumes major chunk of resources. In this situation, the center is left with no other option but to borrow more than Rs2,000 billion every year to run its day-to-day affairs. The debt burden is mounting owing to a status quo approach and due to this the public debt might double in next five years from existing level of over Rs31 trillion.
On external account of the economy, the situation is grim. The current account deficit is yet to be curtailed to the desired level as it stood at $7.98 billion in first six months of the current fiscal against $8.4 billion in the same period of the last financial year when it had peaked to $19 billion in whole financial year.
Despite getting generous support from friendly countries including China, Saudi Arabia and UAE to the tune of $6 billion as deposits, the foreign currency reserves held by the State Bank of Pakistan (SBP) stood at just over $8.19 billion and the country has to pay over $5 billion in remaining five months (Feb-June) period of the current fiscal year. A slow supply of dollars risks eruption of balance of payment crisis.
Now in this situation, the time has come to apply the approach of “Now or Never” because things might not improve by accusing opposition and blaming them all for every economic ills. It’s a fact that the PTI had not inherited economy in a good shape, but they should focus on delivering goods instead of berating their predecessors.
The PTI’s prescription through medium-term strategy paper starts with blaming the previous Pakistan Muslim League-Nawaz (PMLN) government and stated that indeed, poor economic management by the PML-N government further added to the imbalances. It left office with an economy on the verge of a severe macroeconomic crisis, the paper says.
Moreover, it states that import compression would create shortages in energy and commodity markets, leading to a surge in inflation. The exchange rate and money markets would adjust to the worsening economic conditions leading to massive depreciation of the rupee and large increases in interest rates. Such an adjustment would be very costly in terms of the pain it imposes on the citizens, particularly on the poor and vulnerable segments.
The medium term strategy paper argues that with not doing anything not an option a decision, however, had to be taken on the pace of managed adjustment.
One option was to frontload the corrections removing the imbalances at the start of the PTI government term so that the economy recovers to achieve a high growth and productive employment trajectory early in its term.
The other was to take a more gradual adjustment path maintaining a balance of sharp price adjustments when needed and, at the same time, vigorously pursuing structural reform to strengthen the foundations of the economy. The government opted for the latter option for two reasons. First, the high cost of full adjustment in the first two years would fall disproportionately on the poor, and the public safety nets would not fully mitigate that cost. Second, the current economic instability is the outcome of imprudent decisions taken in the last 2-3 years of the previous government which were exacerbated by the deeper structural issues plaguing the economy. These had been unaddressed despite commitments made to the domestic investors and the international community: back-loading structural reform (to achieve higher tax revenue, lower subsidies, and greater international competitiveness) had resulted in their abandonment. Not only the stabilisation program initiated by the last government, almost all previous stabilisation programs remained unsustainable because they were not accompanied by measures to address the structural problems, leading to periodic recurrence of instability.
To break the cycle of recurring instability, the present government is committed to the path of sharp adjustment as needed for combined and front-loading structural reforms with a particular focus on improving governance in key utilities and state-owned enterprises (SOEs). This will provide a solid foundation for economic recovery as the efficiency gains from structural reforms will hasten recovery, sustain it longer and mitigate the pain of a long period of stabilization-related belt-tightening, particularly for the susceptible fractions of the population.
It is expected that the twin strategy of stabilisation and structural reforms will, in the medium-term, help bring down the fiscal deficit to sustainable levels of around 4 percent, eliminate the current account deficit, and increase investments and promote productivity-led exports. The expectation is that in the next 3-4 years, following curtailment of aggregate demand, the economy will start growing at a respectable rate of around 5 percent.
The government stands ready to take additional measures, if needed, to safeguard economic stability and reorient the economy towards export led growth, the strategy paper said.
The writer is a staff member