Honeymoon period over?

If surveys are any indication then the ruling Pakistan Tehrik-i-Insaaf’s (PTI) honeymoon period during which unpopular but critical decisions can be taken with no lasting political implications is clearly over.

Ipsos, a company headquartered in Paris, created a full service research agency in Pakistan on 16 December 2011, as “numerous multinational brands – and among them a majority of the Ipsos Global PartneRing clients – are present in the country with increasing Market research and Consultancy needs.”

The Ipsos survey results are devastating for the ruling party: four in five Pakistanis fear that the country is heading in the wrong direction, same as in 2019; three in four Pakistanis expressed dissatisfaction with the way things are going in Pakistan today and the same proportion describe the current economic situation as bad; inflation is the most worrying issue for Pakistanis (from 25 percent last year to 36 percent this year) as well as the top issue in all four provinces while unemployment was the second most worrying issue in three provinces though in Balochistan it was the third most worrying issue with poverty at number two.

The usual response of governments facing unfavourable survey results is to dismiss it as being manipulated due to an inherent (or otherwise) bias of the surveyors, of the respondents, flawed selection of the sample and in Pakistan, more often than not, accusations are hurled at the opposition for manipulating the results.

Be that as it may there are few in government today who would challenge these results based on the visible rise in food inflation, unemployment and poverty levels – indicators that would naturally change the perception of many voters except the diehard supporters of any political party in power. In addition, the constant harangue led by the Prime Minister and faithfully followed by his 40 plus cabinet members of accountability and corruption may have won the party the 2018 elections, as it claims, but it certainly is no longer a major issue for the public coming a distant fifth in Punjab (4 percent) and Khyber Pakhtunkhwa (3 percent).

The narrative of the Khan administration two years down the line is that the economy was in shambles when it took over power and hence the reforms required and the accompanying pain associated with taking extremely difficult decisions would naturally be for a lot longer; add the onslaught of the pandemic and the pain is for even longer than envisaged. The question is if the narrative of blaming previous administrations is valid and if so whether the actions taken by the Khan administration have been appropriate?

There is wide consensus that the state of the economy late August 2018 was in an appalling state with a historically high current account deficit of 20 billion dollars requiring an outflow of over 11 to 12 billion dollars in 2018-19 alone (for interest and repayment of past loans acquired from multilaterals, bilaterals, commercial banks abroad, as well as clearing debt equity payments issued at rates of return well above the market rate during Dar’s tenure as the Finance Minister). Foreign exchange reserves held by the State Bank of Pakistan (SBP) at the time were only 10.3 billion dollars. The PTI government procured around 11 to 12 billion dollars in loans from “friendly” countries soon after it took over power and rightly blamed the previous administration for compelling it to take such massive loans.

The trade deficit, a major component of the current account deficit was contained through massive rupee depreciation during the past nearly three years. Ironically, the one corrective measure taken during the tenure of Shahid Khaqan Abbasi as the prime minister (August 2017 to end April 2018), possible only after Ishaq Dar’s ignominious departure from the country, was in reducing the Real Effective Exchange Rate (REER) from the historic high of 121 in June 2017, considered as gross over valuation of the rupee, to 107.4 by June 2018 though, contrary to basic economic theory, this had little impact on significantly raising exports or curtailing imports. Abbasi’s critics argue that this decision was taken subsequent to the visit of an IMF team late 2017 when the government realized that after the 2018 elections the country would have to go back on a Fund programme.

The PTI government, in an attempt to curtail the trade deficit, went to the other extreme and depreciated the rupee to such an extent that the REER as per the SBP website was a little over 93 in June 2020. This led to import curtailment of not only luxury imports but also raw material and semi finished products which led to a contraction of GDP (projected at 1.5 percent by the Fund and the government though actual contraction was higher by nearly 2 percent due to Covid-19) with at least 50,000 laid off by December of last year alone. The pandemic simply exacerbated the situation that was created by over-zealous economic team leaders’ acceptance of the IMF upfront policy decisions. Trade deficit was also curtailed through a prohibitively high discount rate of 13.25 percent (July 2019 till March 2020) - around 2 percent higher than the consumer price index of 11.2 percent (though the International Monetary Fund had projected 13 percent for the year) and more than 5 percent higher than the core inflation. The high discount rate (i) attracted around 3 billion dollars of “hot money” from abroad at a high cost most of which has since left the country; and (ii) a historically high reliance was placed on Pakistan Investment Bonds (PIBs) – in 2013 about 1.3 trillion rupee worth of PIBs were issued while in 2018, the time PML-N’s tenure ended, 3.4 trillion rupee PIBs’ were issued (at a negative real interest rate) however the Khan administration raised reliance on PIBs to 10.9 trillion rupees in 2019 and 12.2 trillion rupees only till March 2020 (before Covid19) as noted in the Economic Survey. True that the discount rate was cut in March 2020 and five cuts later it is at present 7 percent but there is uncertainty in the market about which way the discount rate would go given that it is lower than the CPI by over 2 percent (with which the discount rate was erroneously pegged last year) and higher than the core inflation by 1.4 percent.

The government has also extended the maturity of loans to reduce the burden of overall debt during its tenure, and increased reliance on procuring expensive short term loans from the commercial banking sector abroad. And refuses to acknowledge what it accuses previous administrations of: that these policy decisions would raise the indebtedness for future generations by more than during previous administrations especially as its economic team leaders have identified 38.6 billion dollars of external loans required for the duration of the IMF programme of thirtynine months. And the cabinet appears to be unaware of the dangers of raising domestic debt especially through PIBs and the impact on inflation.

The budget 2020-21 envisages: (i) no curtailment in current expenditure in total terms (other than with respect to foreign debt repayment relief extended by creditor nations for a year due to the pandemic) and federal ministers rhetoric aside the fact is that a reduction in use of allocated funds by the Prime Minister and President may be good for optics but is a very small component of total expenditure; (ii) state owned entities are continuing to take a significant amount of our tax money; and (iii) revenue base has not been strengthened.

There are some positive policy options being considered by the government particularly with respect to (i) merging all subsidies (including power sector subsidy, Utility Stores Corporation) under the Ehsaas programme, (ii) reducing the outlay on pensions and (iii) signing binding contacts with the Independent Power Producers on changes in their agreements after the MoUs (though this would require clearing of 400 billion rupees owed to the IPPs); however at present public discontent has yet to spill out on the streets though the federal government employees anger at the rise in inflation with their salaries not raised in the current year’s budget for the first time in the country’s recent history was witnessed on Constitution Avenue in Islamabad.

To conclude, the Khan administration must acknowledge that public anger against its tackling of the economy is rising and it is time to evaluate policies in detail by independent economists rather than relying on briefings provided by those who are responsible for these policies in the first place.

Copyright Business Recorder, 2020