Money Matters

A tale of two bailouts

Money Matters
By Mehtab Haider.
Mon, 05, 19

There are similarities in the economic situations during the years of 2008 and 2019 as in both periods the prolonged policy inactions increased the cost of adjustments for people of Pakistan.

Adviser to Prime Minister on Finance, Revenue & Economic Affiars Dr Abdul Hafeez Shaikh along with CM Sindh, and Provisional Finance Ministers of Punjab, Khyber Pakhtunkhwa and Balochistan holding a meeting with the IMF mission led by Ernesto Ramirez Rig.-INP

There are similarities in the economic situations during the years of 2008 and 2019 as in both periods the prolonged policy inactions increased the cost of adjustments for people of Pakistan.

In 2008, the political transition in the wake of general elections, where caretakers did not take corrective actions, then the tragic murder of Mohtarama Benazir Bhutto in December 2007, and finally the change of two finance ministers had clouded the economic front with uncertainties

First, Ishaq Dar said goodbye to the cabinet as the Pakistan Muslim League-Nawaz (PML-N) had left the coalition government after the emergence of differences with the ruling Pakistan People’s Party (PPP) led government on the restoration of the then judiciary.

Later, Syed Naveed Qamar was appointed finance minister but he could not deliver. Finally renowned banker Shaukat Tarin was taken onboard to take care of economic situation. He did finalise a deal with the International Monetary Fund (IMF), but the growth slumped to the lowest and inflation went skyrocketing at that time. The exchange rate which was kept overvalued had also fallen suddenly.

Now in 2019, Pakistan Tehreek-e-Insaf (PTI) is ruling the country. Indecisiveness continues to remain their hallmark and they have also brought changes in the economic team getting a resignation out of Asad Umar as finance minister and then ousting the governor State Bank of Pakistan (SBP) and chairman Federal Board of Revenue (FBR) unceremoniously.

The mess on economic front has piled up and it cannot be cleaned without taking corrective policy actions. There will be more pain this time because the structural problems continue to be unsolved for rather things deteriorated especially on fiscal fronts so the cost of adjustment would be more for poor and middle-income groups.

With low growth rate and rising inflation, Pakistan’s economy is heading towards stagflation now exactly at a time when the country is struggling to get another bailout package from the IMF.

The real GDP growth rate has nosedived to 3.29 percent for the outgoing financial year against the desired fixed target of 6.2 percent.

The provisional GDP growth rate for fiscal year 2018-19 is estimated at 3.29 percent. The growth of agriculture, industrial and service sectors is 0.85 percent, 1.4 percent, and 4.71 percent respectively. The GDP growth rate for last financial year 2017-18 stands at 5.53 percent against initial estimates of 5.79 percent which were lowered down to 5.2 percent through constituting a committee by the PTI-led regime couple of months back.

The agriculture and manufacturing sectors could not perform well, threatening to increase poverty and unemployment in Pakistan where over one million youth is entering into the job market on per annum basis.

The current macroeconomic situation has further worsened in the outgoing financial year as the GDP growth remained lowest in last nine years since 2010-11.

The agriculture sector which contributes to national economy to the tune of 19 percent has grown by just 0.85 percent with negative growth of major crops due to decline in production of cotton, rice, and sugarcane by negative 17.5 percent, 3.3 percent, and 19.4 percent respectively. Only wheat has grown at a rate of 0.5 percent only. The large scale manufacturing saw negative a growth of 2.06 percent in fiscal year 2018-19.

The inflationary pressures, which dropped a little last month still possess the potential to rebound owing to the possibility of entering into an IMF program and making rampant adjustments by raising tax rates and hiking utilities prices.

On fiscal side, the budget deficit is all set to witness new peaks in the outgoing fiscal year as Dr Hafeez A Pasha a renowned economist has estimated that it might touch 7.5 to 7.6 percent of GDP on June 30, 2019 against 6.6 percent of GDP last year.

With such massive scale of budget imbalance, it will definitely impact the external account as well. Although, the current account deficit is projected to decline

Under the IMF policy known as “one-size-fits-all”, the fund is suggesting Egyptian model for Pakistan as a prescription of its economic ills and asking for free float of exchange rate, tightening of fiscal and monetary policies, achieving primary balance into surplus and withdrawal of subsidies. It is the wish of the IMF to implement adjustment program in the first two years; however, Pakistani authorities are asking for a staggering approach to implement the reform agenda over a period of three years with back-loaded approach as much as possible.

It’s a fact that the ill-devised strategy of the policymakers has put Pakistan in a tight spot where it’s hard to swallow bitter pills of IMF on account of tough conditions under the program or fail to get a fresh bailout package.

Now the IMF is in dictating a position to impose its toughest condition on fiscal, monetary and exchange fronts knowing that Islamabad does not have any other option but to seek its assistance to keep its economy afloat in the wake of heavy repayment requirements in coming months and years ahead.

Having a thin majority within the parliament, it will be the hardest choice for the incumbent regime to accept tough IMF conditions and then sell it politically at a time when Prime Minister himself conceded that inflationary pressures were mounting up, creating problems for the masses.

There are available no simple solutions to economic ills of decades-long problems but the crux of this whole solution lies in raising taxes through broadening the tax base, rationalisation of expenditures by eliminating overlap of ministries and departments in the aftermath of 18th constitutional amendments as well as boosting up exports in a leap forward. The economy of this country cannot be run with a status quo approach.

There are fears that the similarity between 2008-10 and 2019 may not resurface again as the IMF program was suspended in 2010-11 owing to differences over Reformed General Sales Tax (RGST) when Dr Abdul Hafeez Shaikh assumed charge as finance minister. We can pray that the upcoming IMF program may not face the same fate this time.

The writer is a staff member