Disastrous year under the PDM

Pakistan’s economy is under stress with low foreign reserves and high inflation. Activity has fallen with policy tightening, flood impacts, import controls, high borrowing and fuel costs, low confidence, and protracted policy and political uncertainty.

Despite some projected recovery, growth is expected to remain below potential in the medium term. Poverty will inevitably increase with pressures from weak labor markets and high inflation. Further delays in external financing, policy slippages, and political uncertainty pose significant risks to the outlook—The World Bank, South Asia Economic Focus (Spring 2023).

The last several years have not been ideal for Pakistan’s economy. Political instability and the rulers’ inability to govern have led the country towards an economic disaster. After the regime change through a vote of no-confidence on April 10, 2022, the coalition government of Pakistan Democratic Movement, (PDM) took oath with the promise to provide relief to the people already struggling to meet their needs. However, the government has miserably failed to offer any relief till date. On the contrary, inflation has skyrocketed.

Shehbaz Sharif, Prime Minister of Pakistan, on completing one year in office, through tweets [reported by Business Recorder on April 12, 2023] highlighted the overall economic challenges faced by his government, blaming his predecessor for leaving behind economic landmines, and disruptions in global fuel and food supply lines.

The Prime Minister claimed that his government was taking pains to repair, rebuild and deepen Pakistan’s diplomatic relations, which were a dealt a severe blow by the previous regime. He also mentioned the 2022 unprecedented floods his government had to face, yet was making efforts to diversify the energy mix to provide relief and target subsidies to the people of Pakistan. He further added that the PDM government was successful in removing Pakistan’s name from the grey list of Financial Action Task Force (FATF).

Shehbaz Sharif linked the current price hike to the geo-strategic rivalries, rise in fuel prices, and historic floods. However, he failed to mention his government’s failure to address concerns of international lenders, especially the International Monetary Fund (IMF), in time.

The Prime Minister should have acknowledged mismanagement of economy by his two finance ministers, namely, Miftah Ismail and his successor Muhammad Ishaq Dar, in pushing the country to an economic meltdown and historic high inflation, especially in food items.

The World Bank’s recent report, South Asia Economic Focus (Spring 2023), points out that distortive policy measures, period of exchange rate caps, import controls, and the delay in IMF’s Extended Fund Facility (EFF) programme are the main causes of the current economic disaster. The report further highlights that the potential risk to the economic outlook is still lurking due to non-completion of IMF programme as well as failure to obtain expected financing needs.

The report further mentions other risks facing Pakistan that include political instability, deterioration of domestic security and external economic conditions, and financial sector risks associated with revaluation losses, liquidity shortages, and high sovereign, exposure.

The report further states that the decline witnessed in economic activity from July to December 2022 was due to the floods. The external account weakened in first half (H1) of fiscal year (FY) 2023 due to a shortfall in foreign exchange reserves, but due to import embargo, trade deficit declined by 32% on year on year basis.

The report goes on to reveal 11.1% decline in remittances, partly due to the exchange rate cap making informal non-banking channels preferable. It also states that decline in remittances directly affects the common citizen’s capacity to cope with economic shocks. The report highlights that the current account deficit shrank to US$3.7 billion in H1 FY23 from US$9.1 billion in H1 FY22. With weaker sentiment and lower foreign exchange inflows, current account witnessed the largest half-year deficit in 12 years.

An overall outlook of the country, having fifth largest population of the world at 235.8 million, with current GDP of US$ 380.6 billion and per capita GDP of US$1613.8, is facing daunting challenges for its survival. Dependent on imports, the country is left with no choice, but to restrict these to maintain foreign exchange reserves.

Resultantly, it not only discourages formal business activity but also forces traders to use informal ways to run their businesses. Similarly, the government’s failure to control currency smuggling has severely affected its foreign exchange reserves. This fact is also emphasised in the World Bank’s report that remitters are preferring informal or non-banking channels over formal ones, to transmit funds due to huge differences in currency rates.

Coercive measures to curb imports have a direct bearing on our exports that are heavily dependent on imports. Official statistics show that due to import restrictions, current account for Jul-Feb of FY 2023 posted a deficit of US$ 3.9 billion as against US$ 12.1 billion last year. This is mainly due to US$ 37.4 billion imports (FOB basis) compared to US$ 47.3 billion last year, a 21% decline during Jul-Feb FY 2023.

Though import restrictions help to reduce current account deficit, the major setback is witnessed by the export sector. Our exports during July-Feb for FY 2023 (FOB basis) dwindled significantly by 9.7% and reached US$ 18.6 billion as compared to US$ 20.6 billion last year.

The general atmosphere of the country is rather bleak. We are facing political, security, economic and judicial challenges while due to rising terrorism, security forces are planning a military operation. In this scenario weak economic conditions will not be able to sustain these challenges. Failure to comply with the IMF has already caused a huge financial loss to the government, is badly affecting our currency rate and adding to the plight of the common people.

Besides global lenders, our bilateral partners are also not happy with us. The government completed its one year on April 10, 2023 but as yet our foreign minister has failed to normalize country’s relationship with the United States. He even failed to arrange official meetings between the Prime Minister and the President of the United States. Even China and friendly Middle Eastern countries are giving us cold shoulder. Though they have rolled over loan payments, there is still a trust deficit.

Our government needs to realize that the country’s’ sustainability lies in structural reforms that alone can fix our governance and economic affairs.

Any further compliance of action items given by foreign lenders to generate revenue for meeting fiscal needs will further increase inflation, creating a potential threat of anarchy in the country. Therefore, we should rather focus on controlling wastage of revenues and improving productivity of government officials by assigning them deadlines and targets.

We need to implement the measures agreed with the IMF on reducing circular debt and government’s footsteps in state-owned enterprises. There is an urgent need for exploring new avenues for broadening the tax base, focusing on improvement and export of human capital and renegotiation of bilateral trade agreements with China and other states to boost our exports. Without undertaking these measures, the dream of sustainable growth will remain unfulfilled.

(Huzaima Bukhari & Dr Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023