The worst is not over

It’s been a bad couple of weeks for the prime minister. A public quarrel between his two most senior deputies causing cabinet members to take sides. A damning report by the Khyber Pakhtunkhwa Provincial Inspection Team on the Peshawar Bus Rapid Transit (BRT) holding the PTI’s KP government responsible for public money wastage, faulty planning and project mismanagement. The prime minister’s BISP name change own-goal criticised by the government’s own foreign minister. If this was it, that would’ve been bad enough. But it isn’t. In fact, these issues pale in comparison to the government’s number one problem right now: a continuously weakening economy with no improvement in sight.

Now in the eighth month of its term, the government’s economic performance so far has been characterised by rising fiscal deficit, rising inflation and slowdown of GDP growth. The public is feeling more than just a pinch and the patience of even the government’s most ardent supporters is beginning to wear thin. Despite the government’s attempts to divert attention away from the economy as it has done before with other issues (remember Sahiwal?), fears over the state of the economy and the government’s lack of capacity to steer the economy are only getting stronger.

The pressure is mounting and the criticisms are growing louder each day. Then-and-now videos of Imran Khan and Asad Umar previously mocking economic decisions of the PML-N government and, now, justifying similar decisions of their own are being aired on TV. Comparisons showing better economic indicators during the PML-N’s term than the PTI’s are being flashed on prime-time talk shows every day. Tough questions are being asked. Is the PTI’s economic team really up to the task? Do they know what they’re doing? The newcomers aren’t so new anymore. The settling-in period is over.

Inflation always attracts more public scrutiny and criticism than any other economic indicator. And that number hasn’t been worse than it is right now for a long time. Inflation came in at 9.4 percent for the month of March, the highest in over five years, and is expected to hit double digits in the near future. The government has recently announced increases in the prices of gas, electricity and petroleum. Even aggressive policy rate hikes by the State Bank, 5 percent in total since January 2018 (3.25 percent during the present government’s term) have not been sufficient to curb inflation so far.

To compound the country’s economic problems, inflation has been accompanied by a slowdown of GDP growth. Compared to the government’s GDP growth target of 6.2 percent for the current fiscal year, the IMF is projecting only 2.9 percent growth, the World Bank is expecting only 3.4 percent GDP growth, the Asian Development Bank is forecasting 3.9 percent growth, while the State Bank of Pakistan is projecting growth between 3.5 and 4 percent. These projections indicate that we will have the lowest GDP growth this year since 2012-13. GDP growth projections for the coming fiscal year (2019-2020) are even lower. The economy is on the path of stagflation, a situation where you have high prices, declining output and high unemployment.

There are also strong concerns regarding the sliding currency. The result of a 34 percent depreciation of the rupee against the dollar over the past 16 months has been a paltry 1.9 percent increase in exports in the first half of the fiscal year. So far, the benefits of rupee depreciation have been outweighed by the higher inflation it has caused. The stock market has performed badly as well. The KSE-100 is down 13 percent or 5,600 points since the PTI came into power.

Despite the price increases, rupee devaluation and large development spending cuts – or ‘corrective measures’, as the finance minister calls them – the fiscal deficit has actually increased to a six-year high in the first half of the fiscal year. The fiscal deficit for the full fiscal year is expected to be at least over 6 percent of GDP, which would be worse than every year under the previous government. The main reason for the high fiscal deficit has been the government’s lack of discipline with current expenditures and failure to achieve tax revenue targets. Contrary to all the chest-thumping and self-congratulation about austerity measures, current expenditures actually rose by 17.3 percent in the first half of the fiscal year. The car and buffalo auctions haven’t done the trick. On the revenue side, the government is expected to miss its tax collection target of Rs4.4 trillion by around Rs400 billion.

But these economic difficulties are only temporary and will eventually give way to better, more prosperous times in a couple of years, right? That’s the story the finance minister is trying to sell but his script is weak. Cryptic elevator analogies aside, he has been unable to provide clarity on what he is trying to achieve and how he plans to achieve it. There has been an alarming lack of direction and purpose. The finance minister’s words and numbers tell very different tales so far. Given the weak growth outlook and high policy rate, the PTI’s promise of ten million jobs and five million homes looks nothing more than a pipedream right now.

Although the finance minister has now finally announced that he intends to sign a programme with the IMF, he has dithered on this matter over the last eight months in a manner which defies logic. He has taken a lot of the actions an IMF programme was expected to entail – energy price increases, devaluation, policy rate hikes – but without actually signing an agreement with the IMF. As a result, our economy has suffered from the contraction that many dreaded from the IMF programme without reaping the benefits of the actual programme.

An important thing the finance minister has been seemingly unable to comprehend is that the IMF programme is about more than just the loan received from the Fund. For international investors, lenders and businesses, an IMF programme provides a level of comfort and assurance which makes it easier for them to decide to invest in or lend to Pakistan. Even organizations such as the World Bank and Asian Development Bank base their decisions to provide loans and grants to our government on the basis of the IMF reviews. This is the reason representatives of both these organizations have been present during the quarterly IMF reviews in the past. The finance minister’s inability to appreciate this reality and his resultant indecisiveness on the IMF programme resulted in an extended period of uncertainty amongst investors, businesses and lenders which has undoubtedly played a role in the slowdown of economic growth.

The PTI had pinned a lot of hopes on Asad Umar being the star performer of Imran Khan’s cabinet. Instead, he has become the prime minister’s Achilles heel. Asad Umar was the only man in the PTI who knew what his portfolio would be if Imran Khan ever became PM. He had years to prepare. So his lack of preparedness and decisiveness as finance minister is both inexplicable and inexcusable. There have been strong rumours of his exit for several months now. Two reasons may be holding the prime minister back from making the call. First, the embarrassment of sacking a key minister so early in the government’s term, and secondly, and equally importantly, the prime minister doesn’t seem to have an obvious replacement. If this is the case, the government is in serious trouble.

The PTI’s reckless and incompetent management has caused huge damage to our economy and exposed the party’s lack of capacity to govern. There is no evidence to suggest that the worst is over. In fact, the economy is expected to get worse and there is no sight of any light at the end of the tunnel. Inflation is expected to rise further and GDP growth is expected to become even slower, which will have adverse effects on both employment levels and people’s incomes. The prime minister has unsuccessfully tried to divert people’s attention away from his government’s economic incompetence by continuously attacking the opposition. It is time Imran Khan gets off the top of the container, rolls up his sleeves and finds a solution to this economic mess. If he doesn’t, it may all be over for him very soon too.

The writer is a former consultant at the Ministry of Finance.

Email: bilal.a.kayani@gmail.com

Twitter: @BilalAKayani