Economic reforms – bumpy road ahead

Senate elections was the time when economic commentators were anticipating a change of tide in favour of PTI-led and ruling coalition, in terms of making legislations that are an imperative for the much-needed structural reforms and fulfilling IMF conditions. Now, purely on numbers the ruling party does not have a majority in the upper house and if the chairmanship goes to the opposition, treasury benches will not be in the driving seat in the Senate.

The PTI government remains on a weak ground in the backdrop of last week’s events, although the prime minister has called opposition’s bluff by seeking a vote of confidence successfully. But will it be enough to offset the psychological damage caused by the loss in the senate. The next step is senate chairmanship. If PTI and allies secure it, the government shall be back on a strong footing; or else, the hardship may persist.

The IMF programme has hung in the balance since the start of 2020. Requisite legislation and measures related to energy sector, public sector entities, and taxation have remained pending for a long time that hindered completion of IMF review. Now, with staff level mission completed, some required legislations probably will lead to IMF board approval.

For example, the Nepra Act is pending with the national assembly’s standing committee. This is a past condition, and perhaps, it needs to be passed before getting the nod of Fund’s board. Then, there are pending amendments in the SBP Act and SOE laws. All these are prior actions to move forward. Back channel discussions with the IMF continued throughout Covid-19 and since Nov 2020, ‘Q-Block’ and SBP are of the view that good news is around the corner with respect to resumption of IMF programme.

With staff level agreement taking place in Feb 2021, the perception is that the board approval would come right after the senate elections. The reason was that with the expected simple majority for PTI in the Senate along with its chairmanship, the roadmap for legislative reforms would smoothen. Now that is in limbo. It could have repercussions on the IMF programme.

However, this does not mean that the government cannot get any legislation done. For that to happen, it needs simple majority in both houses – it has razor thin majority in the lower house, and a little short in the upper house. But PTI and allies’ numbers are in a better position now than prior to the elections.

Simple majority means the majority within the members present and voting. This implies that in cases where opposition (PDM) is not keen to push the government back, the government may get the numbers needed in the upper house. Even if the government is unable to get it passed from the upper house - this can happen in a joint session – where the PTI and allies now have simple majority.

Theoretically and technically, the government has now more power to legislate versus what the case was prior to the senate elections. But the situation is not as good as it was hoped. Even prior to the elections, there were incident where legislation was possible, such as passing of few bills related to FATF. PTI government was vulnerable and had to give in to others (both opposition and allies) for passing of any bill; that hasn’t changed much now either.

The difference is, that now the allies and disgruntled members of PTI have received the message that the opposition has teeth to dent the government – manifested by Gilani’s win in Islamabad. That will bring a much-weakened PTI on to the negotiation table. That will give maneuvering room to government allies such as PML-Q and MQM, who have now smelled the blood.

That is politics. In terms of economics and governance, the tough times are not over. The PM and the government received a lucky break in the form of pandemic. The tough IMF conditions were relaxed. Increase in energy tariffs was postponed. Interest rates were almost halved. Oil prices went south, easing the import bill. Low travel resulted in current account surplus despite economic recovery.

Now, the commodity prices are sharply heading north in anticipation of world travel opening up. This, with economic recovery, shall result in higher import numbers. Soon, monthly imports could be north of $5 billion. The bonanza of upbeat growth in home remittances may slow down with increase in travel.

Inflation is again showing signs of resurgence. Food price administration failure continues. The pressure from IMF could build on, forcing the government to pass on impact of high oil prices to consumers in the shape of increase in petrol and diesel prices. Gas prices require massive adjustment too. The corporate tax exemptions may come to an end. SOEs’ expenditure shall be rationalized, leading to layoffs. Furthermore, there are signs of hike in interest rates (hopefully by not much) sometime in this calendar year.

These are tough decisions. It is hard to implement reforms given the high political temperature. But they are imperative for continuation of the IMF programme and to instill structural reforms. But the political capital has eroded and continues to erode. However, if the government wins the Senate chairmanship (one way or the other), it may succeed in partly salvaging the situation, otherwise it would be a bumpy road ahead.

Copyright Business Recorder, 2021