June Issue 2019

It is just the beginning, but many Pakistanis have already started to feel the bite of the economic crunch in their day-to-day lives. As the country prepares itself to embark on an International Monetary Fund (IMF) -backed three-year economic stabilisation programme, the life of the country’s low-and-middle income groups is going to get tougher with each passing day.  

Inflation has already shot up to seven per cent in the first 10 months of the current fiscal compared to 3.8 per cent exactly one year ago, according to the official figures. During March and April, 2019, inflation hovered between 9.41 and 8.8 per cent respectively, indicating a rising trend in the prices of food and consumer items.

Dr. Hafeez Shaikh, Advisor to the Prime Minister on Finance, Revenue and Economic Affairs and Khusro Bakhtiar, Federal Minister for Planning, Development and Reform (R), at a press conference in Islamabad.

The government also raised the natural gas tariffs by almost 25 per cent last October, while after a negligible increase, electricity prices too are set to climb up sharply as efforts are underway to lower the gnawing Rs.38 billion monthly losses in this sector by erasing subsidies and the recovery of unpaid bills.

As the cost of living sky-rockets, business and economic activities have steadily been slowing down over the past year or so because of the country’s ever-growing economic woes and political uncertainty. Scores of industries and businesses – both small and large – are on a cost-cutting drive, laying off employees, or slashing salaries. For the new entrants, these are bad times for job-hunting.

The Pakistan Tehreek-e-Insaaf (PTI) government is taking a series of “prior actions” to qualify for the IMF programme – worth $ 6.0 billion at the interest rate of 3.2 per cent. This loan programme has to be approved by the IMF board, which is no longer as lenient as it used to be when Pakistan-US relations were cosy.

Faced with stringent IMF conditions, the government raised the benchmark interest by 150 basis points to 12.25 per cent on May 20, while the rupee has taken another beating, shedding nearly 20 per cent of its value against the dollar in the inter-bank market since the PTI formed the government.

Overall, the depreciation in the Pakistani currency between December 2017 and  May 2019, has been around 42 per cent against the dollar, raising an alarm among most local businesses and industries. The currency market is likely to remain volatile in the coming months, despite assurances by the new State Bank Governor, Reza Baqir, that the free-fall of exchange rate will not be allowed.   

But the bad news for Pakistan’s proverbial ‘man on the street’ does not end here. More belt-tightening and revenue generation measures are in the pipeline in the coming 2019-20 (July-June) budget, making the life of ordinary Pakistanis a lot more miserable.

Yes, it is only the beginning of hard times, which are all set to get tougher as Pakistan enters the next financial year on July 1.

The cash-strapped government has no choice but to bite the bullet and go for harsh and unpopular budgetary measures that can act as a destabilising factor in an already polarised political atmosphere.

The opposition parties have enough reasons to fan the flames of public discontent against the backdrop of harsh economic times.

Leading opposition parties, including the Pakistan Muslim League-Nawaz (PML-N), the Pakistan Peoples’ Party (PPP) and the Jamiat Ulema-e-Islam-Fazal (JUI-F), are all threatening to launch an anti-government drive. But among these parties, only the JUI-F’s Maulana Fazlur Rehman seems serious in taking on the government. The other two parties have loads at stake in the system and their top leaders remain bogged down by corruption cases. Strong posturing apart, the PML-N and the PPP are unlikely to try and upset the applecart – at least for now. But this does not mean that the PTI government can breathe easy.

“This is one of the worst economic crises in Pakistan’s history,” says Dr. Ashfaque Hasan Khan, a former Finance Ministry advisor, who is currently serving as the principal and dean of the prestigious School of Social Sciences and Humanities at NUST, adding that it will “hit the common man the most.”

Tough times ahead for Pakistan’s underprivileged classes.

The situation was a challenging one in 1998 as well, when Pakistan conducted nuclear tests in response to India and, as a result, faced crippling US-led international economic sanctions. This time around, however, matters appear more precarious for the underprivileged classes, according to Dr Khan.

Akbar Zaidi, another leading economist, says that the low economic growth will take its toll. “In the current fiscal, the economic growth is expected to be around 2.8 or 2.9 percent,” he says. “After the IMF programme, it is expected to remain pegged at these levels over the next two years.”

The government, however, has kept a GDP growth target of 4.0 per cent for the next financial year.

“The low economic growth would render at least five million people jobless over the next three years,” continues Zaidi, quoting a recently published research paper. “The unemployment rate will climb up to 8.0 per cent by 2021, from 5.6 in fiscal 2017,” he adds. “This means that Prime Minister Imran Khan’s vision to create 10 million jobs will remain unfulfilled, while at least 9.0 million more people will be pushed below the poverty line.”   

The situation is a nightmarish one for a government trying to fix the economic mess it inherited from the previous dispensation. But the PTI’s economic managers’ inaction, flawed priorities and posturing in the initial months of their rule only contributed to making the challenge a little more complex.

Right now, both political instability and economic troubles are feeding off each other. The government – in power with a slim majority in the Parliament – has little space to manoeuvre on both, political and economic fronts.

The economic challenge is massive and nothing short of extraordinary vision, commitment and political will can put the economy back on track. PM Khan was let down by his key player, Asad Umar at the very start of the innings.

Umar, considered a PTI star, was neither able to provide a concrete economic roadmap, nor take timely decisions on important issues – including going to the IMF – in the initial months of power. The former finance minister kept giving conflicting signals on whether the government would seek an IMF package, creating uncertainty in the markets. Eventually, he lost his portfolio.

The new-look economic team of the PTI government led by Finance Advisor, Dr. Hafeez Shaikh, comprises time-tested technocrats – an attribute that is the team’s strength as well as its weakness. Shaikh’s team is going for textbook solutions in its attempt to fix the economy, while critics argue that this will only bring more pain for the country.

Dr Ashfaque Hasan Khan, a member of the government’s Economic Advisory Council (EAC) and one of the frontline critics of the IMF programme, says that the IMF conditions will result in more debt accumulation, further slowing down of the economy and an increase in unemployment.

“Do you think the private sector will borrow from banks when the discount rate is at more than 12 per cent? High interest rates discourage economic activity,” he says. “The government has also made the cost of bank borrowing and interest repayment high for itself because of the hike in interest rates and sharp devaluation. This is pushing the country into a debt trap.”

The central bank officials maintain that the interest rate has been raised to check inflation and suppress demand. But Dr. Khan challenges the SBP’s premise, arguing that “[the] wrong instrument is being used to contain inflation, and that a “hike in the interest rate matters in checking inflation in the West, where heavy bank borrowing is a norm – from house mortgage to the household items. In Pakistan, this is not the case.” Khan adds that “interest rate hike is a demand side instrument, which is now being applied on the supply side situation.”

A leading businessman close to the PTI government and who requests anonymity, says that the measures taken by the new economic team have compounded uncertainty. “The sharp devaluation has led to the dollarisation of the economy… The government needs to take urgent steps to revive the confidence level,” he says. “[The] Finance Ministry and the SBP should act to calm nerves, but a strong message isn’t coming in from the government.” He adds that the local currency is now undervalued and should be maintained at the level of 150 rupees or so, to a dollar.

There is a growing view among many experts that the government should not leave the exchange rate at the mercy of market forces, which will encourage speculation and keep the markets jittery.

In times of economic slowdown, experts are also sceptical about the Federal Board of Revenue’s (FBR’s) capacity to achieve the record-high revenue target of Rs. 5,550 trillion for the 2019-20 fiscal, which is 35.4 per cent higher than the revised expected revenue collection of around Rs. 4,100 trillion, in the current fiscal.

Pakistan’s tax-to-GDP ratio of 11 per cent remains the lowest in the region. FBR officials say that around 85 per cent of tax is paid by 300 companies or so, while in a country of 210 million people, only 2.0 million people file tax returns, including the 0.6 million who belong to the salaried group.

“The revenue target for the next fiscal is unachievable,” says Dr. Khan. “Every quarter, the IMF targets will need to be met and [in the event of] failure, [the] target for the next quarter will be raised. This means every quarter there will be a mini-budget, which will create tax anomalies. This IMF programme cannot be implemented as it is full of pain and suffering for the poor and the fixed income group,” he continues.

Prime Minister Imran Khan meets Christine Lagarde, Managing Director of the International Monetary Fund, on the sidelines of the World Government Summit.

The IMF is likely to take a tougher stance on the implementation of its conditions compared to the past because of Pakistan’s frosty relations with the US under the Trump administration.

A top government official of the government’s economic team, who asked not to be named, brushed aside the concerns about the IMF programme, saying that those who criticise it, fail to give an alternate plan. “For Pakistan, there was no option but to go to the IMF – the lender of last resort,” he says. “Pakistan needs economic stabilisation and must carry out the long-pending reforms. The IMF programme will give confidence to the markets and investors and open our doors to secure lending from other donor agencies, like the World Bank and the Asian Development Bank,” he adds.

The government blames past inaction and slow decision-making from July 2017 to December 2018, as the cause of the deepening economic mess, including holding the rupee value at artificial levels by throwing dollars in the market. “In turbulent waters, you need strong hands on the steering wheel,” says a senior government aide, adding that the 5.8 per cent growth spurt had increased the aggregate demand, including imports.  “The crisis is because of a supply capacity constraint,” he continues. “It is the reflection of [a] lack of domestic production capacity… the purchasing power increased and this demand has to be met through imports – including that of pulses and fruits. It is a structural flaw that the growth spurt leads to a balance of payment crisis.”

Any government will find itself boxed in a situation where most of the expenditure – 38 per cent for debt servicing and 20 per cent for defence allocations – is inflexible, while the revenue base also remains stagnant.

For the government insiders, another challenge is that the most important front of the economy is now being managed by non-PTI faces, which has hurt the PTI brand.

Among the old faces, the Minister for Maritime Affairs, Ali Zaidi, is trying to take on an active advisory role on the economic front, but sadly has little knowledge or experience. The rest of the economic team members of the PTI have vanished after the recent cabinet reshuffle, according to sources.

Even Jahangir Khan Tareen, the PTI’s most experienced economic hand, remains barred by some of his colleagues from attending meetings, said one source. The PM seems to be surrounded by a small group of smooth-talking bankers and new faces, who are leading government policies.   

As the government tries to go for reforms and structural changes, including fixing the loss-making sectors and state-run enterprises, the next financial year and beyond will test the leadership and the people’s patience to the utmost.

The government will have to chart its way through an economic and political minefield amidst high public expectations. Unfortunately, it does not have the liberty of a margin of error. Will the PM and his team be able to defy the prophets of doom? The cards seem to be overwhelmingly stacked against the government.