The Battering Economy

With a delay in reaching a staff-level agreement with the International Monetary Fund (IMF) on the desperately needed bailout package for the cash-strapped Pakistan, the government has started implementing the harsh conditions, making it more difficult for the people to survive.

Following 10 days of negotiations, Finance Minister Ishaq Dar said that virtual discussions on the ninth review of the programme will continue. However, he acknowledged that both sides have not yet reached a staff-level agreement.

The Pakistani authorities have received a Memorandum of Economic and Financial Policies (MEFP) from the IMF, outlining all the requirements, procedures and policy directives for the completion of a $7 billion loan programme.

An IMF team, led by its Country representative Nathan Porter visited Pakistan from January 31 to February 9 to discuss the ninth review of the government’s programme backed by the Extended Fund Facility (EFF) arrangement.

Pakistan direly needs financial help from the international donor agency and friendly countries such as Saudi Arabia, the UAE and China to mitigate the problems it is confronted with.

The foreign exchange reserves of the State Bank of Pakistan (SBP) has reached an alarmingly low level of $3.19 billion as of February 10, 2023, providing import cover for around two weeks only.

The successful conclusion of the ninth review would ultimately provide the next tranche of $1.2 billion to Pakistan.

The IMF team left the country without issuing any statement, which raises uncertainty about the conclusion of the negotiations. However, the finance minister emphasised that there was no ambiguity. Dar termed the talks successful and categorically said that Pakistan has received a draft MEFP, which will be fully implemented.

It is a fact that the government needs to fix the economic mess and for that it has make reforms, which are no doubt painful but necessary.

In the meantime, the global ratings agency, Fitch, has cut Pakistan’s sovereign credit rating by two notches from CCC+ to CCC-, citing policy and large refinancing risks, critically low foreign exchange reserves and difficult IMF conditions.

Fitch typically does not assign outlooks to sovereigns with a rating of CCC+ and below. Its downgrade comes after S&P Global in December cut the long-term sovereign credit rating for Pakistan by one notch to ‘CCC+’ from ‘B’, citing a continued weakening of its external, fiscal and economic metrics.

The persistent delay in the IMF deal has further deteriorated the country’s economy, already in turmoil with the massive decline in the rupee value against the dollar, high fuel prices and the inflation at a multi-decade high of 27.6 per cent.

According to Fitch, the shortfalls in revenue collection, energy subsidies and inconsistent policies with a market-determined exchange rate, were the reasons behind delays in the ninth review of the IMF programme, originally due in November 2022.

However, in the absence of the IMF programme, the traditional allies of Pakistan, including Saudi Arabia, the UAE and China have expressed reluctance in the provision of funds to Pakistan, which is also critical for other bilateral and multilateral funding.

Of the $7 billion IMF programme for the fiscal year 2023, $3 billion represents the deposits from China under the State Administration of Foreign Exchange (SAFE) that are likely to be rolled over and $1.7 billion loans from the Chinese commercial banks, which the Fitch assumes will be refinanced in the near future.

Pakistan is battling with the backbreaking high inflation, a massive rupee depreciation against other currencies, especially the dollar, and the precariously low levels of foreign exchange reserves.

It is high time that the government functionaries should adopt sound economic policies to address these difficulties and for that purpose, first it has to identify and resolve the root causes of these problems, such as the political instability.

For a country with a population of 220 million and, which is on the frontlines of the global warming fallout, this is suicidal.

No doubt, Pakistan’s ratio of taxes to gross domestic product (GDP) is one of the lowest in the world, as some of the key segments of the economy, such as agriculture and other corporations, are exempted from the income tax.

Instead of raising revenue through imposition of new taxes on the already burdened people, the government should stop giving subsidies to certain sectors of the economy.

Pakistan’s economic crises are deeply aggravated, as structural deficiencies and uncertain policies raise default risk, which will exacerbate the political instability and security challenges.

The high foreign debt has caused a severe financial crisis. It is abject that the foreign exchange reserves reached the nine-year low level, making the government unable to purchase essential imports such as oil, gas, fertilisers and food items.

Moreover, the country has experienced persistent high inflation through most of 2022, with the food inflation hovering around 30 per cent, which is adversely affecting the economic activities and causing hardships for millions of people.

In 2022, the government imposed restrictions on the imports of various commodities to save dollars, resulting in modestly lowering the current account deficit but this has also slowed down the industrial operations and even caused shutdowns and layoffs in some sectors.

The IMF is pressurising Pakistan to fill the yawning fiscal gap of over Rs900 billion through imposition of additional taxes or reduction in its expenditures to restrict the budget deficit within the desired limits.

Nonetheless, this seems to be the most painful deal with the IMF. Though the agreement could temporarily help Pakistan avoid a default, the programme will hardly be a panacea for all the economic ailments.

Pakistan is basically confronted with two main challenges; firstly, reducing the current account deficit and building up foreign exchange reserves to stabilise the exchange rate and, secondly, the persistent fiscal deficit, which requires measures to address the instabilities in the public expenditures management and revenue collection.

The government should take measures, including ensuring a manageable trade deficit by adopting productivity; enhancing technology to make domestic production more competitive and attracting investment in exports; enacting a supportive institutional, regulatory and monetary policy stance with a market-determined exchange rate; curbing the highly charged political confrontation between the leading political parties; adopting a prudent fiscal stance by making public expenditures more productive and equitable, especially energy and public enterprise subsidies; implementing a non-discriminating tax regime; correcting misallocation of expenditures and revenue between the federal and provincial governments; target the powerful elites to play a role in the economic stability of the country and giving social status to the exporters and the taxpayers.

Pakistan should also start utilising its blue economy. The coastal areas should be a source of prosperity and wellbeing of the citizens. Pragmatically investing in the blue economy could help diversify the country’s economy and reduces its dependence on traditional sectors, such as agriculture and manufacturing. To sum up the issue, Pakistan must focus on good governance to implement the reforms policy.