Stinking political quagmire

The topmost immediate requirements to take the economy out of the tailspin are political clarity and certainty, although there is no certainty that economic default can be averted. The message of having ‘political clarity’ is loud and clear coming from external friends and lenders.

Theoretically, there were three options. One: to extend the current government for one year. Second: to have an extended caretaker setup. Third: to go for elections. Whatever the case, this must be announced and acted upon – that is what lenders want.

In both — first and second cases — a premise of emergency, perhaps financial, is required. The second option has little or no buy-in from political forces. And the first option is stumped by the dissolution of the Punjab Assembly.

The third and viable option is fresh elections. That is the saner option, although the path would not be an easy one for the new government. The economic pains are far from being over. The new government will sign a new IMF (International Monetary Fund) programme and will have to introduce structural reforms. Here, there are limited options—undertake debt restructuring by the government herself or kick the can down the road further.

In the case of willingly undertaking debt restructuring, it would take a year or so, and would be more painful; but this could lead us to the much-needed path of sustainable high growth which is imperative for a country of a median age of 24. But if the can is kicked down the road, invariably, a similar situation of default will arise again, when the government of the day attempts to go for a high growth. This balance of payment frequenting rut must stop. The country deserves better.

Then the fourth option is the ostrich approach, i.e., continue with the PDM (Pakistan Democratic Movement) for a few more months and do nothing, and let the country move towards a very painful forced default.

The SBP’s (State Bank of Pakistan’s) forex reserves are down to $4 billion. The IMF cannot be taken for granted. Without doing what is required, the IMF may rescind the programme. This would lead to a forced default on external debt with no negotiation powers of the sovereign.

In this scenario, foreign lenders would ask domestic debtors to sit at the table and take the hit too. And this could be disastrous for the country. In the case of haircuts on domestic debt (dominated by commercial banks), some banks’ balance sheets would wipe out completely. And in case of debt reprofiling and deferred/forgone interest payments, the ability to lend to the private sector would end, as the cash flows and profitability of banks would be extremely constrained. This could result in the shutting of many private businesses. Hyper-inflation and dollarization of the economy would be a dire consequence. The country surely deserves better.

Thus, a big no to the status quo. This government must go to the IMF or leave. Else, they could be forced out. Perhaps, that is what the PML-N (Pakistan Muslim League-Nawaz) London leadership wants, as this could give them some narrative, even if it may not sell. Whatever it is, a population of 220 million cannot become an escape goat to one family. Even sane voices in PML-N are losing their temper. Time is not far that many in PML-N would start bashing their own party leadership publicly like what Miftah is doing.

Now the question is what would happen after the end of Darnomics. Caretakers must immediately comply with the IMF conditions for resumption of the programme. Recent commitments from Saudi Arabia and the UAE are in fact preconditions of the IMF 9th review. And if the money pumps in prior to the IMF, it would at most buy a month or two before a forced default.

However, general elections may take more than 90 days from now. The country’s precarious balance of payment situation may not wait for this long. In the midst, a new IMF programme may be a necessity. This idea is being toyed by some senior PTI leaders. Asad Umar, for example, is of the view that caretakers should sign a new programme with the IMF and all the political parties must sit together and agree to the terms of that programme and comply with it if they come to power after the general election.

That is a wise idea. The country needs an economic consensus (not an economic charter) of undertaking structural reforms. All the political actors should accept the reality. And whoever the people vote to come to power (could be PTI based on popularity), should behave like a big brother and take all the parties along and steer the country out of this crisis. However, will PML-N (potentially the losing party as predicted by pundits) rise to the occasion or reply to the PTI (Pakistan Tehreek-e-Insaf) in the same tone the latter has used for the former? Will 220 million inhabitants of this country be this unfortunate? It’s time for every stakeholder to introspect and do the needful.

Copyright Business Recorder, 2023