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Economic notes

June 5, 2018

The PML-N’s economy: Part - I


June 5, 2018

Taking a break from the Economic reforms series, let’s evaluate the PML-N government’s performance in managing the economy.

When the government assumed office in June 2013, the economy was in dire straits. In the previous five years, growth rate had averaged three percent (the lowest in the country’s history) and inflation had averaged around 12 percent. The current account deficit was low but official reserves had declined rapidly from a high of $18.2 billion on June 30, 2011, to around $10 billion on June 30, 2013. An IMF programme signed in 2008 was aborted mid-way due to failure to implement structural reforms relating to the tax system. This led to a near collapse of foreign inflows as the World Bank and Asian Development Bank also stopped providing concessional policy loans.

The fiscal imbalance was mounting, with deficit reaching 8.2 percent of GDP. A huge amount of circular debt had piled up which was threatening smooth operations of the power sector. Power outages were frequent and severely affected the industrial output as well as peoples’ comfort. The process of reforms was halted. Privatisation was never pursued but rather a distorted scheme of employees’ participation was introduced that benefited only a handful of employees and was stopped only after the courts declared it unconstitutional. In the social sector, the Benazir Income Support Programme was a major initiative for transferring cash to the poorest of the poor.

It was under such depressing economic conditions that the government introduced a vibrant economic programme within a week of taking office. This programme was soon translated into a three-year IMF programme. Reforms in all the key sectors – macro economic framework, energy (power and oil & gas), privatisation, financial sector, capital markets, central bank autonomy, anti-money laundering and countering financing for terrorism (AML/CFT) regulations and ease-of-doing business – were covered under the programme. The prime minister and finance minister showed full commitment and sincerity in implementing the programme.

At the outset of the programme, two major initiatives laid the foundation for economic revival. The government made special provisions to clear the outstanding circular debt by paying off outstanding tariff differential subsidy (TDS) claims and injecting fresh equity in distribution companies (DISCOs), to cover their losses and shortfall in collections. This also helped clear the remaining circular debt and immediately revived a dormant capacity that was shut-down for lack of liquidity. The second initiative was to bring tariffs closer to the cost-recovery level, thereby significantly improving the cash-flow of the system. These two measures helped lessen the problem of loadshedding and made it somewhat manageable.

The rest of the economy continued to pose challenges for another two quarters, as the Fund disbursements were not front-loaded. And for nearly two years they were mostly used to return payables of the previous loan. The policy loans from the World Bank and ADB were also back-loaded to the fourth quarter of the year. Accordingly, reserves kept depleting until February 2014 and the exchange rate experienced considerable volatility.

The first break came in the form of a $1.5 billion grant in March 2014 from the Saudi government that helped stabilise the reserves. In the meanwhile, two reviews under the programme were successfully completed. A Eurobond, issued in April 2014 after seven years, was highly successful. In the fourth quarter, the World Bank and ADB also provided support. From there on, there was no looking back, as macroeconomic indicators had also started showing signs of improvement. The GDP growth in 2013-14 entered the four percent range and inflation was about eight percent.

In the second fiscal year (2014-15), despite the momentary disruption caused by the ‘dharna’, the upward trajectory of the economy continued. Yet another break for the nascent recovery came in the form of a steep decline in the international price of oil. This led to a bonanza in the form of significantly reduced bill of oil imports in the country. The most stringent condition of the programme was to build reserves from sources other than the foreign inflows from the IMF, World Bank, ADB and other bilateral loans – all of which were subject to an upward adjustor in target. That meant privatisation proceeds, auction of spectrum license and, if these were insufficient, through purchases from the inter-bank market.

The significant decline in oil imports bill resulted in a glut of forex supply in the inter-bank market. Therefore, the State Bank of Pakistan had no difficulty in mopping up excess liquidity without impacting the exchange rate. The ease of meeting those targets was so comforting that on a couple of occasions the country agreed to voluntarily adjust the reserves accumulation target upward to reflect the confidence and assurance of the success of its policies.

Meanwhile, the growth momentum had started picking up as the growth rate climbed to 4.4 percent in 2014-15, and inflation plummeted to less than three percent. Fiscal deficit was down to five percent, policy rate was down to six percent, from nearly 10 percent in 2013. Privatisation and other reforms programme were put into action as well, leading to a significant surge in economic activity and rise in business confidence.

Key capital market transactions, relating to commercial banks and a portion of a petroleum company, were highly successful. CPEC was finalised and investments under this initiative also starting picking up. The Fund programme was also on track and all reviews were successfully completed. Further resources from the World Bank and ADB also kept flowing in. Consequently, the reserves were rising at a brisk pace.

The third year (2015-16) saw further strengthening of the economy, with stronger performance on growth (4.7 percent), inflation (less than four percent), fiscal deficit (4.6 percent) external deficit (1.7 percent) and rising investments. The reserves climbed to an all-time high of $24.5 billion around the end of September 2016 and the exchange rate was relatively stable. Despite the dilution of reforms in the case of privatisation, considerable structural reforms were implemented – most of them requiring legislative actions.

To top it all, the country successfully completed the three-year IMF programme for the first time in its history, and that too under a democratic government. However, what was to come in the next two years was something no one could have predicted.

To be continued

The writer is a former finance secretary.

Email: [email protected]

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