With the regime change completed in Pakistan, the geo-politico-economic situation is so fluid and intertwined that any attempt at offering crystal ball predictions can fall like deck of cards once the assumptions on which the hypothetical scenario building stands, crumbles. Even then it is worth the risk to share views on the various scenarios that are likely to develop before the next elections in 2023 (again a very fundamental assumption to the following analysis).
How will the ongoing IMF move for its 7th and 8th review? It will be its first experience in dealing with a pseudo national government (PNG) of Pakistan, although it has dealt with multiple interim governments of the country. It is also an interesting political experiment whereby different ideological paths for growth and stabilization are bedfellows for power.
An early reward can be handed with an implicit nod from the members of the review committee to the new government by considering the first 100 days as its ‘honeymoon’ period and hold “continuous fruitful discussions” on the contours of the upcoming budget without disturbing the previous government fiscal freebies or asking for a prior actions. The political imperative is to support implicitly the economic policy miracles that the new government will announce in the budget backed by generous foreign funding.
In the background feelers may be floated by the IMF with the help of development partners for the need of comprehensive rescheduling of foreign debt along with a new IMF programme for sustainable growth. This may please many economic gurus that were advocating re-scheduling as the cure for all our economic ills as if the many previous re-scheduling gifts have given us a lasting economic security. They may have postponed the inevitable (default) at the cost of more and more conspicuous private and public consumption.
A very unlikely and least probable scenario is that the IMF sticks to its reservation on the fiscal freebies offered by the previous government and insists on their removal immediately for the 7th review which will most likely be postponed till May. Also insists that the contours of the next budget be discussed threadbare before releasing the 7th tranche. By not allowing a ‘honeymoon’ period, it achieves two objectives. A hidden political trump card held by its majority members to tighten its screws around Pakistan to achieve geo-political agenda of granting surveillance rights on its western borders plus more accommodative and friendly posture towards India and secondly to pave the way for even harsher IMF programme in 2024. It will be a favour to the future generations of Pakistan if it adopts this economic stance although past 30 years’ experience has shown that it wants Pakistan to remain on continuous life support in line with geo-political and geo-strategic interests. Under this scenario, a sub-scenario of clubbing both 7th and 8th review is also possible.
In this chessboard of moves, what are the moves available to the new government? For one thing is sure that it does not want to erode its popularity so early in its fragile tenure. In fact it may want to further strengthen its popularity for elections to be held shortly (18 months) by enjoying the fake honeymoon on the back of freebies given by the previous government instead of the real honeymoon periods meant for tough reforms.
It can finance the fiscal freebies by printing money, throwing the unpopular SBP act under the rug (finally, our economic sovereignty will be restored) and appointing a new toe the line as SBP governor as the term of the present governor ends on May 4th. A major partner of the PNG drives its strength from retail and wholesale traders-cum-hoarders. An implicit agreement may have been reached to go slow with the POS and broad basing of tax regime in exchange for releasing hoarded items. Coming weeks may witness a downward trend in food inflation, thus fulfilling the promise to the masses which may also slow down the freefall of the local currency.
However, the Achilles’ heels is the CAD. A temporary reverse TTs episode (aka remittances) can flood the market with USD, strengthening the rupee. The previous government’s begging bowl has overflowed with money and re-scheduling from the Middle East and China and new begging bowl has to be designed. Another partner of the PNG is gung ho on employment creation, so any programme of privatization will be shelved. The only other route is import compression. Fiscal freebies related to Construction sector is not the mother of 22 industries but it is the mother of all imports and subsidies, e.g., via subsidized fuel as an intermediate raw material for consumption of cement, of-course with the forward linkages to employment.
By observing the dynamics of exchange rate and fiscal freebies one or two years prior to the change of every government since the 1990s, the following rational phenomenon emerges. The government desperate to win power for the second term, open its floodgates of fiscal freebies along with negative real interest rates to buy votes. The rational agents smell the change early on and the demand for raw material and luxury imports goes up with the expectation that rupee value is going to be re-adjusted downwards with the change in government. This turns into a self-filling prophesy and feedback loop to falling rupee, rising inflation and imports culminating in a CAD crisis. The quasi-casino economy also kicks in with full gear to finance the elections.
If the fundamental assumption or binding constraint made at the beginning of the article is relaxed, the future and nature of the IMF programme depends on the timeframe of elections with one exception, i.e., if the PNG experiment is successful and/or has the blessing of unknown powers, it may be worth extending it for another five years. If it is not, and elections are announced more than 6 months or less from now, the programme can end successfully with two lollipops given in between for world optics and wait for the new government to sign another ‘stabilization’ programme, as ‘structural’ reforms can wait for yet unknown geo-political/geo-strategic trump cards to appear in the future review meetings.
Copyright Business Recorder, 2022
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