Emerging Economic Constraints

by, Dr. Ashfaque H. Khan

There is a general consensus within and outside the country that the economy of Pakistan has never been in such a bad shape since its inception in 1947. Pakistan did face serious difficulties off and on over the last 64 years but managed to sail through because of a competent economic team and strong leadership. There is a general view in the country that such economic team and leadership are missing today. It is for this reason that the people of Pakistan are nervous about the future outlook of the economy.

A long and harsh winter has gripped Pakistan’s economic landscape over the last several years. Slower economic growth, persistence of double-digit inflation, large fiscal deficit, unprecedented surge in public debt, rise in unemployment and poverty, and weakening of the country’s physical and human infrastructure are some of the ailments that the economy is confronted with.

Budget 2012-13 is likely to be the last budget of this dispensation and will be a truly election budget. The Prime Minister has already announced that no new tax measures will be imposed in the forthcoming budget but at the same time more “relief” would be provided to the people (apparently to win the next election). Such a policy stance does not augur well for the economy which is already in a dire strait.

Where would be the economy of Pakistan by the end of the ongoing fiscal year or before the presentation of Budget 2012-13? All available information suggests that economic growth may improve to 3.5-3.8% owing to good cotton crop as against 2.4% last year. Investment rate is likely to fall further from a 37-year low of last year (13.4%), industry may experience 2.0-2.5% growth, both unemployment and poverty are likely to increase further (the government has neither release poverty number nor the basic data to measure poverty for the year 2010-11), inflation would continue to follow the trend of the last 50 months by remaining at double  – digit, and fiscal situation is likely to worsen further with budget deficit touching almost 7.0% of GDP.

Pakistan’s public debt may touch Rs.13 trillion or 62 percent of GDP mainly on account of large fiscal deficit and depreciation of exchange rate. Current account deficit may touch $5.0-5.5 billion or 2.3-2.5 percent of GDP. Although the size of the deficit would be relatively small, the financing of it would be a serious challenge for the government. Export growth may turn negative and import growth may surge owing to the rise in oil prices.

The developments of external sector may lead to a decline in foreign exchange reserves to $15 billion from $18 billion at the end of last year. In other words, Pakistan may lose $3 billion in foreign exchange reserves, putting further pressure on exchange rate. Pakistan may not seek a new IMF Program but will prefer to enter into a Post Program Monitoring with the IMF for which the discussion has already begun.

In short, the health of the economy may further deteriorate by the time the government presents its election budget in May/June 2012. What are the critical constraints that a new dispensation will face after the election? It is absolutely clear that no single political party would be in a position to form a government. Hence there would be a coalition government facing serious constraints in taking difficult decisions to improve the health of the economy. Pakistan’s economy has reached a point where status quo is not an option. It will require political commitment and a series of short-to-medium-to-long term measures to put the economy on a path of sustained recovery.

Pakistan going to the IMF is written on the wall, it is only the timing that needs to be decided. In the midst of deteriorating trade and current account balances, declining external flows, falling foreign exchange reserves, heavy repayment of external debt obligations and depreciating exchange rate, Pakistan has no option but to seek IMF resources to forestall an emerging serious balance of payments crisis. The question is: should Pakistan go to the IMF when it reaches a precarious condition or should it seek IMF support when it is in a relatively less vulnerable position? The prudent policy dictates that Pakistan should seek IMF assistance as soon as possible.

Fiscal stance, as revealed by the Prime Minister, for the election budget clearly rules out the possibility of Pakistan seeking IMF support any time soon. Hence, the present government is not likely to go to the IMF for a balance of payments support. My view is that the task of taking Pakistan back to the IMF will be left to the caretaker regime. The prior actions of the IMF Program will be extremely difficult for any political government to implement, hence, this unpleasant and yet necessary task will be undertaken by the caretaker regime.

The new dispensation, besides facing the constraints of a coalition government, will also be facing the constraints of the IMF Program. The IMF will certainly ask the government to implement tax reforms to mobilize more resources and cut expenditure by gradually reducing subsidies; address the issues pertaining to rotten public sector enterprises, power sector, circular debt, and most importantly NFC Award with a view to reducing budget deficit. It will be next to impossible for the new coalition government to implement such policies. It is therefore not difficult to predict the fate of the IMF Program which, on all probability, is likely to face suspension. Fiscal indiscipline will therefore, become the order of the day with disastrous consequences for the economy and national security.

I earnestly pray to God that I am proven wrong. The new coalition government pursues a disciplined fiscal policy, addresses all the challenges that the economy is facing, restores economic stability and take the country towards prosperity and development.

He writer is Principal and Dean at NUST Business School (NBS) Islamabad.Email: ahkhan@nbs.edu.pk

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