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Tuesday December 06, 2022

A fragile economy

October 05, 2022

Pakistan’s economy is under extreme pressure to avoid default. Even though the danger of default has somewhat decreased, the economic conditions are still deteriorating. The country’s debt burden is at its peak, and the recent devastating floods have multiplied the existing financial problems.

Price hikes have played havoc with the economy, and inflation is nowhere under control. The depreciation of the Pakistani rupee is another issue causing problems. Prospects of substantial investments from foreign countries to support the deteriorating economic conditions are also quite low. Dwindling exports and the rising current account deficit and low foreign exchange reserves have also raised alarm bells. We are to go by the book; otherwise default is imminent.

We are pinning hopes on the return of Ishaq Dar as finance minister, but he is no panacea for the economic ills Pakistan is currently facing. There is an immediate need for a more coherent policy and a long-term strategy to cope with the situation. All previous governments, especially the government of Imran Khan, relied on foreign loans to support the economy. This policy of getting loans to pay back the existing loans is detrimental to our economic health. No one can support it. But the most important question is: how to change and what to change to put the economy back on track and avoid the threat of economic default?

The problem with the present government is that it has inherited an IMF programme with the toughest conditions. It also has to accept more such conditions to avoid default. The Extended Fund Facility (EFF) of the IMF is not a viable solution to our economic woes. It is a self-contained problem, but the issue with us is that we have no other choice. At least for the time being, we have to go with the IMF programme and comply with the stringent conditions to support our economy.

Another problem with the present political dispensation is that it is a weak coalition government. The ruling coalition is in no mood to go for fresh elections before completing its remaining term possibly because of the rising and unprecedented popularity of Imran Khan. The government has already earned a bad name due to the rising inflation and price hikes partly contributed by the tough conditions attached to the IMF programme. What options does the government have?

First, we need short-, medium- and long-term strategic policies to correct the historical wrongs of totally relying on foreign loans and aid programmes. We need to impose an economic emergency through consensus by taking into confidence all stakeholders including but not limited to political parties, business owners and other non-political forces. We need to implement a long-term economic strategy, and, if needed, we should pass a constitutional amendment to effectively enforce this strategy. The planning and finance divisions should spearhead this campaign of strategic policy formulation to get rid of foreign loans. The policy should also cover industrial promotion to enhance exports and discourage non-essential imports. Export promotion should be the cornerstone of this new policy.

The second most important thing is to ensure peace and security in the country to attract foreign direct investment (FDI). We must provide an investor-friendly atmosphere to encourage investors to bring their capital in Pakistan. The Board of Investment (BoI) should be strengthened and reinforced with a new dynamic professional management, facilitating both investors and business owners. The BoI needs to act on the policy of investment promotion through simplification of procedures implementing and ensuring ease of doing business in Pakistan. The present BoI setup is incapable of attracting any sort of investment in the country. It needs structural reforms and change in management to become an effective institution. But the fact is that peace and security is the prime factor to attract investment and businesses.

The third important thing is political consensus and stability, which is a must to implement economic policies ensuring security in the country. Political stability through a strong political system will ensure a successful transition to economic stability and robust economic growth to avoid economic default. We need a mature political leadership to avoid imminent default. The government has to initiate steps to convince the opposition to sit on the table to get out of this mess.

The nature of the politics of former prime minister Imran Khan is confrontational, and such behaviour indicates that we are not going to get political stability in Pakistan in the near future. The economy will remain disturbed during such political confrontations. But Pakistan needs relief from political fights to get rid of economic problems. The solution for the current political instability lies in holding fresh elections, but the government is in no mood to go for early elections, and this will remain a cause of hyperbolic economic issues.

The devastating floods in Pakistan have added to the woes of ordinary people. The government is in search of relief for the poor affected by the floods. The international community has shown a lot of sympathy and support in this time of crisis. Pakistan is also expecting the relaxation of loan repayments and debt rescheduling and debt servicing. The prime minister of Pakistan is quite active these days to get this relaxation. Finance Minister Ishaq Dar is also a dynamic minister, trying hard to get in touch with all stakeholders to get relief for Pakistan’s debt rescheduling. The young foreign minister, Bilawal Bhutto, is also making efforts to get relief for the poor affected in floods. There is a lot of hope that Pakistan may get relief in debt repayments by rescheduling outstanding loans from G20 countries and the Paris Club.

The best way to avoid default is to devise proper well-structured consensus-based short-, medium- and long-term strategies. Practical steps should be taken to get the economy back on track. A visionary leadership can help support and gather a political consensus for such a strategy to help Pakistan fight this immediate risk of default. It is believed that Prime Minister Shehbaz Sharif has the capability to withstand pressures and the capacity to come out of his political nest to approach Imran Khan for a political consensus on this issue. This is the best way forward to get out of this crisis.

The writer is a former additional secretary and can be reached at:

hassanbaig2009@gmail.com

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