Stocks, bonds, and currency markets rallied soon after the new government took office. Markets were jittery due to uncertainty, and for the time being there is some semblance of stability. Soon, economic realities will sink in, and exuberance will come under check. However, the poor economic health was already priced in by the markets. The question is how long the current government shall stay in power, and how much money it can fetch from bilateral(friends) and multilaterals.
The challenges are huge. Fiscal deficit is growing out of proportion. While SBP reserves are falling. They both need immediate attention. PM SS should announce his cabinet and let the ball rolling. Two important ministries are finance and energy. The finance minister must work on controlling deficits while the energy minister should work on removing inefficiencies – there should be one minster for both petroleum and power.
The first challenge is to control the growing fiscal deficit. The budgeted federal fiscal deficit was Rs3,990 and after adding the provincial surplus the consolidated deficit was forecasted at Rs3,420 billion. The latest projections coming from finance ministry place the full year federal fiscal deficit at Rs5,550 billion and the consolidated deficit around Rs5,000 billion – around 8% of GDP on rebased numbers. Then there are supplementary grants of Rs800 billion which are pending disbursements. These are mainly for the state-owned companies such as SNGP and PSO.
These numbers aremindboggling. Ever since the vote of no confidence fear became real, the IK government total focus was on populist policies while prudent economic management went to the back burner. The freezing of petroleum and electricity prices have made the fiscal numbers even scarier. There is no borrowing allowed from the SBP at all. The banking system doesn’t have enough liquidity to finance. The reverse open market operations (OMO) have crossed Rs3 trillion. And the cut-off yields in last T-Bill auction were north of 13 percent.
The deficit must be controlled, and the government needs to diversify its avenues of financing. A better option is to look for external fiscal financing options. This to not only reduce the burden of borrowing from the domestic banking sources but also to help in building foreign exchange reserves. The external financing option could reduce the market interest rates and foreign funding to tame the pressure on the currency.
For that to happen, the nod of the IMF is imperative. And the government must show a serious resolve in lowering the deficit. That is why it is imperative to revise the petroleum and electricity prices. Then the government should work on boosting revenues and lowering the expenditures. However, in the maiden speech PM SS generously increased the salary and pension. The government should refrain from such populist measures going forward.
Then the government should approach the friendly countries for some support. There is a rollover of $2.4 billion pending from China. It should be expedited. And then there are rumors of some fiscal support from middle eastern countries. In 2014, $1.5 billion gift money came from a friendly country and that had changed the economic momentum. A similar gesture is warranted now, and the number has to be higher than $1.5 billion. The country needs support to bring stability and prudent policies to slowly move towards a sustainable growth path.
Times are challenging and the reserve building should work on Shahbaz Speed.
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