An IMF press release says that it is imperative that the government should address the concerns of the public by expanding the social safety
rime Minister Shahbaz Sharif, during his two-day (August 23-24) visit of Qatar met with the top leadership of the brotherly country. As a result, Pakistan managed to get a bilateral support package of $2 billion that will help it meet the financial crunch and avert a looming default.
A press release issued by the Foreign Office earlier had stated that during the visit, the prime minister would hold in-depth consultations with the Qatari leadership to review the entire spectrum of bilateral relations. The focus, it added, would be on advancing energy-related cooperation, deepening trade and investment ties and exploring employment opportunities for Pakistanis in Qatar.
The wide current account deficit (CAD) has forced the government of Pakistan to take aggressive measures like mandating pre-approval of imports including machinery and completely-knock-down (CKD) automobiles and mobile phones. This has enabled the government in curtailing the depletion of foreign reserves. The trade deficit in July ($2.7 billion) was significantly lower than in June. However, the policy of import contraction forced a slowdown of the economy. Indeed, such ad hoc measures cannot be sustained. Sooner or later, the restrictions have to be eased and/or removed.
Consequently, over the coming months, the rupee is going to face market dynamics on its organic strength. Despite the recent improvement in current account and value of the rupee, the foreign exchange reserves dropped to approximately $7.8 billion in August 2022 from nearly $10 billion in April 2022.
The government must focus on providing an environment where exports can flourish and businesses can grow. This requires a comprehensive plan and a clear direction from the government. The increased costs of inputs mainly driven by fuel and energy are making it difficult for business operations, especially with a policy rate of 15 percent. After adding commercial bank spreads the cost of funds reaches 17 percent to 18 percent.
With such excessive rates, the working capital and growth-related requirements of business cannot be addressed. This can lead to a situation where businesses can face closure, causing a risk of unemployment and directly impacting government revenues.
Earlier, on the directions of the International Monetary Fund (IMF), the markup rate for Export Finance Scheme (EFS) was raised from 7.5 percent per annum to 10 percent per annum and for Long Term Financing Facility (LTFF) from 7 percent per annum to 10 percent per annum. It is now pegged with the policy rate — ensuring that the gap between policy rate and rates under the EFS and LTFF is maintained at 5 percent.
It is time for the government to come forward to protect low-income groups and struggling businesses. Unfortunately, the current government has failed to show a clarity of thought and take concrete actions in this regard. It has taken an orthodox approach, passing the buck on to the public in the form of price hikes.
The high cost of electricity, reflective of inefficient decision-making and reliance on expensive sources of energy, is charged to domestic and commercial consumers. This means that the public is to pay for the government’s poor decision-making. Further, despite a decrease in international oil prices and recent appreciation of the rupee against US dollar, the government has raised the prices of petrol.
For revenue collection, the government is relying on conventional methods and not exploring new avenues. In the budget for fiscal year 2022-23, the government imposed a 10 percent super tax on ten already tax-compliant sectors. As in the past, tax imposed for bringing the mighty retailers into the net has been revoked under pressure.
It seems that the government is not serious about bringing the untaxed into the tax net. Thus, it will keep on extracting revenue from easy targets and industries. This also shows the overall structural weaknesses of the economy that pose risks for a sustained recovery.
Such a recovery is not possible without providing a conducive environment for the existing businesses and new investors. With short-sighted policies and political instability, the economy will remain trapped in a vicious cycle. Pakistan cannot offer itself as an attractive destination for local investors, what to speak of attracting foreign funds.
The gulf between income and expenses is growing as successive governments post ever larger internal and external deficits, bridged through reckless borrowing. This is mainly because our exports have not been adequate. We need to support our export-oriented businesses. At the same time, we need to introduce policies that encourage emerging sectors.
The world economy is rapidly evolving and the technological landscape is offering new growth opportunities. We need to increase our share in the global export market for information technology and computer services. This can help generate a long-term and sustainable foreign exchange source for Pakistan and lessen its reliance on leveraged funds.
The way forward for sustainable economic growth and inclusive development is the introduction of fiscal reforms and export-led growth initiatives. After the government, on the instructions of the IMF, removed subsidies on petroleum and electricity, the price hikes have triggered hyperinflation.
Historically, the rulers have done nothing substantial to stop the waste of resources by state-owned enterprises. Effective measures to control this waste can significantly improve the share of the social sector and upgrade the living standards of ordinary citizens.
Apart from the above, the government should improve overall governance to prevent the interference of powerful institutions in matters relating to the Executive. The IMF press release of July 13, about the announcement of a staff-level agreement on the combined Seventh and Eight Reviews for Pakistan’s Extended Fund Facility (EFF) requires Pakistan to maintain a market-determined exchange rate and implement appropriate policy actions, including a proactive and prudent monetary policy.
The current policy rate of 15 percent has increased the cost of doing business in Pakistan. This has played a major role in retarding the economy. The government needs to rethink its economic approach and redesign its strategy, keeping in view the fact that the current level of economic growth will create a huge problem for 230 million people. It is imperative that the government should address the concerns of the public, as highlighted in the IMF press release, by expanding the social safety network to protect the most vulnerable.
Dr Ikramul Haq, an advocate of the Supreme Court and writer, is adjunct faculty at Lahore University of Management Sciences (LUMS)
Abdul Rauf Shakoori is a corporate lawyer based in the USA