Economic policy by the interim govt

Given Pakistan is facing very difficult economic challenge, mainly in the shape of bringing debt sustainability, on one hand, and on the other controlling inflation, while also providing as much stimulus, and social protection spending as possible, given a tight fiscal space, and macroeconomic stabilization needs in an overall International Monetary Fund (IMF) Stand-By Arrangement (SBA) environment, the current interim government, especially the finance minister, has a lot more on the plate than a ‘usual’ interim government and its finance minister.

Controlling inflation, which is still quite high, is the key here, especially because falling inflation will not only enhance the fiscal envelope but will also provide greater room for reducing policy rate. Here, while the former will allow greater impetus to economic growth, the latter will once again contribute both to boosting growth, and in lower domestic debt repayment needs.

Having said that, it may make sense for the interim finance minister to bring much-needed balance on the currently over-board reliance on monetary, and fiscal austerity measures to control inflation, whereby policy rate is over-emphasized as the main tool for curbing inflation, while it is quite evident that supply-side, governance-related measures have also a significant say in this regard.

In this regard, the IMF should be sensitized of this needed shift away from over-board austerity emphasis through indicating greater governance-, supply-related reform/administrative efforts.

In terms of increasing external debt sustainability, and reducing imported inflation, the interim government will have to take forward the humongous task of not only building up foreign exchange reserves, but to do them rather quickly, given the high gross financing needs that the country faces; not to mention the likelihood of imported inflation remaining a significant contributor to imported inflation, given it is expected that oil prices will likely rise due to the reported curtailment of oil supply by OPEC+ in at least the short-term.

Here, a significant performance on taking forward – and even building up where possible – the initiatives made under the Special Investment Facilitation Council (SIFC) to bring in greater foreign investment in the country.

Moreover, within the overall effort, the interim government should also look to improve the performance with regard to setting up of Special Economic Zones (SEZs), especially in terms of providing better governance-, and incentive structures.

Three other important areas where structural reforms agreed with the IMF as a starting point, and which may see enhancement under more ambitious planning, need to be focused by the interim government, and which are in the areas of domestic resource mobilization, energy sector, and enhancing state-owned enterprise (SOE) performance, including possible privatization.

Here, on one hand, it may make sense to learn from the successful experiences of, for instance China’s and Scandinavian countries’, in terms of running SOEs – including learning from the Mixed-Ownership Enterprises (MOEs) experience of China – and to tread the path of privatization in a more cautious way, given the negative fallout of the late-1980s to mid-2000s Neoliberalization, a policy mindset that led to the so-called ‘golden age of privatization’.

For instance, the writer’s recent article ‘Independence Day economic resolutions’ in another newspaper, points towards the importance of seeing a non-neoliberal, social democratic styled role of public sector, including in matters of privatization, may provide some useful guidance to the interim government, and to an elected one later.

The article indicates in this regard: ‘In the light of the above, especially given the successes of for instance, China, and the Scandinavian countries, of the public sector in implementing a meaningfully inclusive, resilient, and sustainable economy, it is important that economic results should extend to seeing a more balanced role of the public sector in terms of the extent of the privatization process, and the running of state-owned enterprises (SOEs).

The neoliberal mantra, over the years, of excessive privatization, and weak regulation of the private sector has created deep cracks in terms of economic resilience, especially when it came to preparedness to deal with existential threats like climate change, and the Covid pandemic, perpetuation of the ‘profit-over-people’ mindset in the private sector, and increasing income and wealth inequalities.’

Economic diplomacy is another important focus area for the interim government, mainly in terms of alignment, and harmonizing the bilateral/multilateral climate finance inflows, agreed earlier with regard to the climate change-related catastrophic flooding from last year.

Secondly, greater effort may also be made to take advantage of the reported debt pause clause for countries suffering from climate disasters announced by the World Bank recently. Thirdly, as one of the top-ten climate vulnerable countries, it may make sense to discuss with the IMF greater allocation of special drawing rights (SDRs) in the light of the overall case presented under the ‘Bridgetown Initiative’ for climate vulnerable countries.

Copyright Business Recorder, 2023