Politico-economic challenges

As inevitable engagement with the IMF looms, the new government must devise a strategy to implement agreed-upon reforms

Politico-economic challenges


n March 3, questions being raised about legitimacy of his victory and overall transparency of the general elections held on February 8 notwithstanding, the National Assembly elected Mian Muhammad Shahbaz Sharif for a second time as prime minister of Pakistan. He secured 201 votes against 91 polled by the rival candidate, Omar Ayub Khan, a grandson of Field Marshal Muhammad Ayub Khan and son of the late Gohar Ayub, a former speaker of the National Assembly and foreign minister in the government of Pakistan Muslim League (Nawaz). Omar Ayub is a senior leader of Pakistan Tehreek-i-Insaf. Barred from contesting elections on the party’s symbol (cricket bat), like others he opted to join Sunni Ittehad Council after they won seats as independents.

Controversy around the election process has lingered even after elections of speaker, deputy speaker and premier. It appears that the disgruntled parties will continue to stage protests and voice their concern. Many unsuccessful candidates have already approached the Election Commission of Pakistan, the election tribunals and superior courts for redress of their grievances. Nonetheless, the prime minister is poised to select his cabinet soon. With that the new Executive will start functioning.

The country is faced with numerous political and economic challenges. The ordinary citizens are desperate for respite from the never-ending escalation of prices. Violations of the principle of separation of powers have not only undermined the governance system but also severely hampered the economy.

Pursuit of power, coupled with appointment of individuals based on personal affiliations rather than merit and the implementation of misguided policies have significantly diminished the purchasing power of an average citizen. As a result, businesses are struggling to stay afloat amidst soaring inflation and high policy rates, exacerbating the challenges faced by the populace. Moreover, bureaucratic red tape, a deteriorating law and order situation and compromised role of the Judiciary have compounded their hardships, making survival increasingly arduous for the people.

In the prevailing circumstances, the new government, burdened with the critical task of alleviating these hardships, faces the daunting challenge of negotiating with the International Monetary Fund for a long-term extended fund facilitation programme to meet its immediate external liabilities and maintain a minimum level of foreign exchange reserves.

It is, thus, imperative to reassess the contours of our foreign policy that remained somewhat lopsided in recent years, resulting in country’s isolation from the global community and severe damage to its economic interests. A visible gulf has emerged between Pakistan and its traditional allies and bilateral partners. The Middle Eastern nations, once considered Pakistan’s fraternal allies, are now establishing trade partnerships with India.

Pakistan’s relations with major world powers, such as China, the United States and Europe were strained after the PTI assumed power in 2018. The new government must adopt a balanced and proactive foreign policy aimed at fostering relationships based on mutual respect and trade. This entails a strategic effort to mend diplomatic ties and forge mutually beneficial partnerships in the global arena.

In addition to the pressing need for fiscal discipline, there exists a formidable challenge in steering the country back to the path to economic stability. Selection of his economic team by the prime minister holds immense significance as it will determine the trajectory of our efforts to address the economic woes. There have been indications that a banker may head the economic team.

Previously bankers have not done too well as finance ministers. The individual appointed to this pivotal office will not only be tasked with spearheading economic reforms but will also be responsible for policy implementation. Considering the complexity of economic challenges, the choice of economic advisors assumes paramount importance in charting a path towards sustainable growth and development. It remains to be seen how the selected team navigates the intricacies of fiscal policy and steers Pakistan towards economic resurgence at a time when our reliance is on debt.

As per the annual borrowing plan for the fiscal year 2023-24, Pakistan’s gross financial needs amount to Rs 25,184 billion. Out of this, debt maturities stand at Rs 16,649 billion, Rs 14,223 billion for domestic debts and Rs 2,426 billion for external debts. Additionally, this year there is an historic high fiscal deficit of Rs 8,535 billion. ABP mentions the initiatives undertaken by the government for debt management and enhancing competitiveness and transparency.

The government has amended Treasury Bills Rules, 1998, and Ijara Sukuk Rules, 2008. These changes enable the government to specify features of securities and use multiple mechanisms for debt raising, including capital market institutions.

The maiden auction of 1-year fixed-rate Ijara Sukuk in December 2023 witnessed significant participation, mainly from the non-banking sector, indicating progress in domestic debt capital market development. These reforms aim to make government borrowing more competitive and transparent. The government also implemented reform measures under programme loans from the World Bank and the Asian Development Bank that include fiscal framework publication, tax harmonisation, debt management, digital payment system and women empowerment initiatives.

The ABP highlights that during the first half of FY24, the government’s borrowing operations proceeded smoothly. Interest expense reached approximately Rs 4.2 trillion, 88 percent of it stemming from domestic debt. Through expenditure rationalisation measures, the government achieved a federal primary surplus of Rs 1.5 trillion, resulting in a federal fiscal deficit of Rs 2.7 trillion. Around 77 percent of deficit financing came from domestic sources and 23 percent from external sources. The government retired short-term treasury bills of approximately one trillion rupees.

Gross issuance of fixed-rate Pakistan Investment Bonds reached Rs 840 billion against a maturity of Rs 1.2 trillion, with gross issuance of floating-rate PIBs amounting to Rs 5 trillion against repayment of Rs 2 trillion. Gross issuance of Government Ijara Sukuk stood at Rs 1.3 trillion, with no maturity recorded for Shariah-compliant instruments. Furthermore, the government raised Rs 30 billion from its inaugural Ijara Sukuk auction on Pakistan Stock Exchange.

Flows in National Saving Schemes remained subdued. External budgetary disbursements totaled $5.4 billion, with significant portions received from multilateral and bilateral sources, as well as through Naya Pakistan Certificates. External budgetary repayment amounted to $3.3 billion during this period. Additionally, China SAFE deposits and Saudi deposits of $1 billion and $3 billion, respectively, were rolled over for one year in July 2023 and December 2023. A $1.2 billion bilateral debt rearrangement was reached with the Exim Bank of China for FY24 and FY25. Moreover, the government received $1.2 billion under the IMF’s stand-by arrangement and $1 billion in bilateral deposits from the UAE for balance of payment support.

Given the heavy reliance on debts, it is imperative to prioritise measures for boosting revenues by fostering a conducive environment for investment. Moreover, Pakistan urgently needs to implement structural reforms to enhance tax collection, tapping into its considerable potential to spur growth.

As engagement with the IMF looms, the new government must devise a strategy to implement agreed-upon reforms, thereby alleviating pressure on the treasury. Such a proactive approach will not only create fiscal space for investing in the social sector, but also kick-start infrastructure development, fostering job creation and stimulating economic activity nationwide.

*Dr Ikramul Haq, an advocate of the Supreme Court and writer, is an adjunct faculty member at Lahore University of Management Sciences.

*Abdul Rauf Shakoori is a corporate lawyer based in the USA

Politico-economic challenges