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Economic notes

October 17, 2017

Financial emergency


October 17, 2017

In recent days, a number of commentators have, while expressing grave concerns about the economy, suggested that a financial emergency should be imposed to deal with the present economic situation. It is important that we examine the provisions of the constitution relating to financial emergency to understand under what conditions such a measure may be adopted and how it can, if at all, solve the current economic problems.

As part of the provisions relating to Emergency, Article-235 (1) provides as follows:

“If the President is satisfied that a situation has arisen whereby the economic life, financial stability or credit of Pakistan, or any part thereof, is threatened, he may, after consultation with the Governors of the Provinces or, as the case may be, the Governor of the Province concerned, by Proclamation make a declaration to that effect, and, while such a Proclamation is in force, the executive authority of the Federation shall extend to the giving of directions to any Province to observe such principles of financial propriety as may be specified in the directions, and to the giving of such other directions as the President may deem necessary in the interest of the economic life, financial stability or credit of Pakistan or any part thereof.” [emphasis added]

Evidently, to impose an emergency, three critical things are required. First, there should be a threat to economic life (shortages of food and other necessities of livelihood in the market), or financial stability (risk of bank failures, etc), or credit of Pakistan (inability of government to secure foreign loans and credits). Second, under these conditions, the federal government has been given powers to direct provinces to adhere to certain specified principles of financial propriety or to take any measure deemed appropriate to alleviate the threat. Finally, under Articles 235(2) to 235(3), these powers have been extended to giving directions to reduce even the salaries and allowances of both provincial and federal government servants.

At the outset, the prime minister has to make a determination that the country faces the specified threat. In a series of articles, we have reflected on the challenges facing the economy. Are those challenges comparable to these threats? Our answer is firmly in the negative.

The current economic challenges are quite familiar and have repeatedly occurred in the country’s history since 1988, when Pakistan entered its first structural adjustments programme with the IMF. That programme laid the foundation of a market economy powered by liberalisation, privatisation and deregulation.

The external sector, which hitherto was highly regulated, was also liberalised, perhaps more than what was warranted, especially after the Economic Reforms Act, 1991. This law allowed residents to hold, deposit, bring into and take out of the country foreign currency without being questioned as to the sources or reasons for such dealings. Presently, because of a relatively open trade and payments regime, fiscal excesses, drying up of official flows and flight of private capital are leading to an increasing loss of foreign exchange reserves, which cannot be sustained for long.

In the past, we have faced grimmer conditions, such as a current account deficit of eight percent of GDP in 2008 (compared to four percent at present) or SBP reserves of less than $6 billion in June 2013 (compared to $14 billion at present). In each of these situations, there was a policy failure, as we experience today. The continuous decline in reserves (more than $5 billion since last October) will have to be stemmed to restore the external balance, which, in the absence of required capital inflows, can only be corrected through adjustment in the exchange rate.

Now, this situation is not comparable to the one predicated in the constitution and hence a demand from the prime minister to invoke a financial emergency is not tenable. Besides, the nature of the challenge is quite different from what the constitution stipulates, as there is no danger to economic life (economic growth is projected to be the highest in nearly a decade and consumer spending is quite robust), or financial stability (the banking system is highly profitable with credit to the private sector last year at Rs748 billion, the highest ever) or the credit of Pakistan (no imminent threat of default on foreign obligations and sovereigns don’t default on local currency obligations).

More importantly, the primary instrument envisaged in the constitution – ie giving directions to provinces, or cutting salaries and allowances of federal and provincial public servants – would have no effect on mitigating the risks we are facing. If one has to stop the import demand of provinces, this can be done within the existing regulatory framework. Similarly, the wider powers are also not of a type that can correct external account imbalance through a government decree.

It should also be kept in mind that proclamation of both general as well as financial emergencies are required to be placed before a joint sitting of parliament and would be revoked after two months, unless extended through a parliamentary resolution for another two months, at a time, but not beyond six months at most. This timeframe, evidently, is quite inadequate to stem fiscal and external imbalances, which would require persistent and meticulous efforts over a much longer period. The very nature of emergency provisions suggests that these are meant to avert temporary threats emanating from subversion and disruption, and not to correct policy failures.

In sum, while a challenging economic scenario is facing the country, its solution lies within the normal constitutional framework and there is no cause or need for the imposition of a financial emergency.


The writer is a former finance secretary. Email: [email protected]

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