Targets in the PML-N manifesto

The manifesto of the Pakistan Muslim League-Nawaz (PML-N) contains a set of key macroeconomic targets from 2023-24 to 2028-29. This is the five-year duration of any newly elected government after the elections. Credit is due to the PML-N for having worked out and presented these targets. Now, that it is likely to form the federal government these targets have assumed greater importance.

The targets are inevitably optimistic in nature and like all manifestos promise more than is likely to be achieved. However, these targets are relevant from the viewpoint of a forthcoming three-year IMF (International Monetary Fund) programme. They will set the stage for the implementation of a strong and wide-ranging reform agenda, with a focus on the achievement of quarterly performance criteria in the Program.

The fundamental question is whether the PML-N targets for the next three years will be successful in taking the economy out of a very fragile position. Foreign exchange reserves are currently very low in the presence of very large external financing requirements and reluctance of private creditors to lend to Pakistan.

Also, given the weak financial position, IMF is likely to press for very quick moves towards stabilization of the economy. This will require containment of the two deficits in the current account and in the budget. Therefore, there is need in particular to focus on the speed and extent to which the PML-N manifesto proposes to reduce these deficits.

We first look at the target level of deficit in the current account of the balance of payments. The manifesto expects the deficit to be close to 1.2% of the GDP in 2023-24. This is equivalent to $4.5 billion and is likely to be near the actual level.

The projected level of current account deficit is 1.5% of the GDP annually, up to 2028-29. This will require that imports of goods and services not exceed the combined magnitude of exports of goods and services and workers’ remittances.

The projected growth rates are consequentially ambitious of exports and remittances. The level of exports in US$ is expected to increase by almost 9% annually and home remittances by 8% each year. Exports are projected to rise from $38 billion in 2023-24 to $59 billion in 2028-29. Home remittances are estimated at $27 billion in 2023-24 and expected to rise to $40 billion by 2028-29.

The equality between imports and combined exports and remittances implies that imports cannot exceed $99 billion in 2028-29. The estimated level in 2023-24 is likely to be close to $75 billion. Therefore, the annual growth rate of imports of goods and services over the next five years will have tobe restricted to 5.5%.

The big issue is that the PML-N manifesto expects that the GDP growth rate will rise each year from 2.5% in 2023-24 and reach 6% by 2028-29. For this to happen, if the level of international prices increases annually by 3%, then imports value in $ will have to rise by 9% or more in 2028-29 and by more than 6% in earlier years. As such, the envisaged growth rate of 5.5% will require strong measures to restrict imports, including a process of significant devaluation of the rupee.

Also, one of the greatest challenges will be to promote exports such that an increase is achieved annually of 9%. Exports up to January in 2023-24 are at the same level as achieved in the corresponding period of 2021-22. Currently, they are suffering a big loss of competitiveness due to the quantum jump in electricity and gas tariffs in the absence of higher rupee prices, because of the new found stability in the value of the rupee.

Turning the budget deficit, the manifesto has a very ambitious target. The deficit is expected to be 7.5% of the GDP in 2023-24. This is projected to decline progressively to only 3.5% of the GDP by 2028-29.

The strategy for deficit reduction is largely based on a rise in the tax-to-GDP ratio by 3% of the GDP over the next five years. This is an appropriate target and should be achieved by resort to progressive taxation in different sectors. However, the manifesto does not indicate the tax reforms that will be implemented to achieve the revenue target.

The expectation is also that there will be a 1% of the GDP reduction in total expenditure. This will be facilitated by the decline in interest rates and by containment of subsidies, especially by privatization of SOEs. Consequently, the level of current expenditure is likely to fall by up to 2% of the GDP, thereby creating the ‘fiscal space’ for a rise in development spending by 1% of the GDP. This will facilitate the process of growth.

Based on achievement of the stabilization targets, the manifesto presents a very positive picture of the performance of the economy in coming years. The GDP growth rate is expected to show a big upsurge and rise from 2.5% in 2023-24 to 6% by 2028-29. Simultaneously, the rate of inflation is expected to plummet sharply from close to 25% in 2023-24 to a single digit rate in 2024-25 and to only 4% to 6% by 2028-29.

The real test of achieving significantly faster growth and lower inflation will be during the three-year tenure of the impending IMF programme. The process of stabilizing the economy and, in particular, restricting the trade deficit will require significant continuing depreciation of the rupee. Management of the circular debt in the energy sector and reducing it to the level agreed with the IMF will necessitate frequent escalations in power and gas tariffs.

Overall, it is likely that the rate of inflation will remain above 15% to 17% in 2024-25, especially with continuation of strong inflationary expectations. It will be a major achievement if the rate of inflation could be brought down to single-digit even after the end of the next IMF programme.

The achievement of a higher GDP growth rate will hinge on the extent to which the interest rate is brought down during the coming years. Already, with the policy rate at the peak level of 22%, there has been a very big contraction in private investment. Public investment has been crowded out by the extraordinary rise in the outlay on debt servicing. Therefore, unless there is a significant augmentation in the production capacity of the economy, the GDP growth rate will remain limited to 2% to 3%.

Finally, the manifesto anticipates a big improvement in the cumulative level of employment of 10 million over the next five years due to the achievement of the targets. Simultaneously, the incidence of poverty is expected to fall from close to 40% of the population currently to less than 25% by 2028-29. This will require, in particular, relative stability in food prices and a substantially expanded social protection program.

Overall, the efforts of the PML-N in presenting explicit economic and social targets in its manifesto must be recognized. These are inevitably ambitious being part of a manifesto. There is the expectation that the PML-N will form the federal government shortly and proceed to continue the relationship with the IMF over the next three years.

Hopefully, in the negotiations with the IMF for the next programme, the targets in the PML-N manifesto will constitute the starting point. The true test will be in the achievement of financial solvency, without leading to further big increases in the level of unemployment and poverty in the country as in the last few years.

Copyright Business Recorder, 2024