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Monday January 30, 2023

News Analysis: Wading through economic pitfalls

January 14, 2023

ISLAMABAD: Promises of fresh foreign loans to bolster Pakistan’s fast falling foreign currency reserves are set to have just one outcome – more patchwork to sustain a fundamentally anemic economy with no chance of recovery unless pushed under a tough overhaul.

That, in brief, remains the tragic outlook for Pakistan notwithstanding Prime Pinister Shehbaz Sharif’s desperate search for loans from oil rich Islamic countries in the Middle East. In a week when the government celebrated close to U$10 billion worth of pledges for Pakistan’s flood rehabilitation at an international conference in Geneva, consumers across the board were likely slapped with a reported hike of more than 70 per cent in domestic gas tariff. To make matters much worse, the hike may be backdated to July last year when the present financial year began, forcing Pakistanis to brace for a sudden jump in their next gas bills. And if expectations across Pakistan’s financial markets provide any guidance, the next meeting of the state bank of Pakistan on January 23 to review interest rates will likely see a jump beyond the 16 per cent margin set the last time around. If so, this will be a consequence of Pakistan’s stubbornly back breaking inflation hovering around 30 per cent. Last but not the least, consumers can well expect a significant jump in domestic electricity tariff to cater for funding a staggering energy related circular debt, whose massive size today presents the largest threat to Pakistan’s economic health.

Together, the rising cost of gas and electricity along with higher interest rates must be the price that Pakistan pays for a resumption of the country’s stalled IMF loan program. That outcome is set to completely reverse the scorn publicly exhibited by Finance Minister Ishaq Dar when he pronounced his “I don’t care about the IMF” line in early December. To date since the Geneva gathering this week, the meeting between Dar and senior IMF officials on the sidelines has not been followed by any statement on a conclusive outcome. Does the deadlock with the IMF still prevail? That pertinent question continues to make the rounds amid heightened anxiety across Pakistan’s financial circles over the future.

And Dar’s inclusion of private foreign currency deposits in Pakistan within the country’s foreign reserves, has only unnerved a cross section of stake holders. His public utterance on the subject revived painful memories from 1998 when a previous government led by the Pakistan Muslim League-Nawaz (PML-N) under former prime minister Nawaz Sharif, froze up to U$11billion in onshore foreign currency accounts. Instead, depositors were given refunds in Rupees at a rate significantly below the market rate.

That outcome in the aftermath of Pakistan’s maiden nuclear tests, stands in sharp contrast to trends today. The freeze in 1998 was swallowed by many as an acceptable price to pay in the service of Pakistan’s national security interests, given the punitive global sanctions following the nuclear tests. And while sanctions hit Pakistan, an air of respect for Islamabad also emerged in parts of the world, notably the Islamic world. The first Islamic country to arm itself with weapon grade nuclear material had finally arrived. Saudi Arabia stepped forward to provide very timely oil shipments on deferred payments which were in the end reportedly written off.

But today’s trends are led by a failure in Islamabad to make politically inexpedient choices that could have marked a resolution of discord with the IMF earlier. Besides, clumsy choices such as targeting of the IMF publicly by senior figures in the ruling structure, have caused more harm than good.

For the moment, with timely financial assistance from Saudi Arabia and the United Arab Emirates, Pakistan is set to remain afloat without running in to a Sri Lanka type default. And a return to the IMF but only after painful choices seems inevitable.

But ultimately, Prime Minister Shehbaz Sharif and other parties in the Pakistan Democratic Movement or PDM ruling structure will have to bear a heavy political cost. Many among the ruling elite appear fearful of an electoral sweep in favor of former prime minister Imran Khan and the PTI.

And yet in the midst of an unravelling economic crisis, much needed clarity is evident across one front – the fast worsening fate of Pakistan’s low to medium income families whose quality of life is surrounded by growing disarray. The stark contrast between the lives of the relatively few affluent Pakistanis and the ‘have nots’ is evident nowhere more than across the upper class shopping malls. Imported fruits such as jackfruits or off season mangoes or imported apples to name just a few of the exorbitantly priced luxury items, remain on full display. In sharp contrast across low to middle income neighborhoods, access to affordable ‘atta’ (flour) during nearly freezing winter nights remains the norm in parts of Pakistan. And that is clearly a very toxic mix for the country’s future.

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