Missteps and missed marks: macroeconomic stability is just a distant mirage

Despite ostensibly achieving some macroeconomic stability—as evidenced by falling inflation, a stable exchange rate, and an improved fiscal balance—the government is falling short on multiple fronts, failing to meet several structural benchmarks and indicative targets set with the IMF. It is increasingly clear things aren’t as stable as they appear.

The Memorandum of Economic and Financial Policies (MEFP), a document committing Pakistan’s finance ministry and State Bank of Pakistan (SBP) to the IMF, contains several overly ambitious terms that may prove difficult to meet, especially with the current high rates impacting the formal sectors.

While the government has met its primary and consolidated fiscal balance targets for the first quarter, Federal Board of Revenue (FBR) revenues have fallen short of their indicative goals. Suppose FBR misses its target by 1% on a three-month rolling average. In that case, it must apply one or more out of six contingency measures, if implemented, would likely drive inflation higher and further erode investor confidence.

The revenue shortfall is compounded by delays in FBR refunds, which are especially harming export-driven businesses already contending with new taxes and high energy costs. The textile sector is a clear casualty, as many value-added exporters are increasingly reliant on imported yarn and fabric, which bypasses the refund issues tied to domestic goods but raises costs.

The government has also raised the primary fiscal surplus target from 0.5% to 2% of GDP, despite projecting significantly reduced foreign inflows from the private sector. Achieving this target while keeping economic growth above 2% is highly improbable, making these projections unrealistic and ultimately unachievable.

Another deadline looms, as the government has committed to ending captive power usage by January 2025. However, the rush to meet this target disregards the practical challenges: combined heat and power plants, commonly used in fertilizer and chemical industries, are often more efficient, and many factories lack access to the grid. Requiring companies to quickly adopt grid power will force them into significant expenses, and utility companies may struggle to provide power to all users. Additionally, imported RLNG supplies, governed by a long-term contract with Qatar, may complicate domestic gas distribution and raise prices for local consumers.

It’s clear that this shift cannot happen without planning for such extensive consequences, and the government may be forced to seek an IMF waiver. A phased approach would be more viable, allowing inefficient plants to phase out gradually while grid infrastructure is developed.

The government’s missteps are further highlighted by the failed privatization of Pakistan International Airlines (PIA). Serious bidders have pulled out, leaving only a real estate firm embroiled in legal troubles, with a bid that is a fraction of the minimum sale price. This poorly managed process has undermined investor confidence, particularly as the government’s handling of IPPs (independent power producers) has also left potential investors wary. Unilateral changes to IPP contracts have taken an unprecedented toll on local investment sentiment.

The SBP stands out as a better performer, having met all quantitative and indicative targets while maintaining price and external account stability. However, Islamabad is reportedly pressuring the SBP Governor to slash interest rates - a move that could jeopardize these hard-won gains. If left unchecked, the government’s current trajectory risks undoing any progress in economic stabilization, potentially sacrificing long-term stability for short-term political gain.

Copyright Business Recorder, 2024