Uncertainty about reform prospects

According to IMF, economic reform prospects in Pakistan are uncertain and difficult, given the challenge of building strong public consensus. In its "Regional Economic Outlook: Middle East and Central Asia", it has stated that "Morocco and Pakistan have newly-formed governments that have the multi-year horizon needed to enact reforms for growth and employment; but even in these countries, reform prospects are uncertain, given the challenge of building strong public consensus for difficult economic reforms activity". Pakistan's growth rate during the current fiscal year could remain at 2.75 percent while fiscal deficit could exceed 5.5 percent of the GDP due to high expenditures and low income. CPI was projected to increase to 7.9 percent and the level of foreign exchange reserves would remain strikingly low and vulnerable to further downside risks. Sustained large fiscal deficits could lead to higher debt ratios. Increase in generalised subsidies and public wage bill since 2011 that were intended to soothe political and social unrest have complicated the matters further. Talking about various countries in the Middle East and Central Asia, the Fund has observed that low tax revenues and sometimes large quasi-fiscal activities have compounded pressures on deficit and debt. Reliance on domestic banks for financing runs the risk of reducing the availability of credit for the private sector and magnetisation of deficits was creating inflationary pressures. Implementation of fiscal consolidation through improving revenue collection and phasing out energy subsidies in the current socio-economic environment was challenging. Official financing could help accommodate a slower and less painful adjustment, provided it is offered in the context of credible medium-term reform plans.
Observations made by the IMF in its Regional Economic Outlook are neither new nor unsubstantiated. Although these pertain, in general, to a particular group of countries, yet are almost fully applicable to the economic conditions prevailing in Pakistan. Rising fiscal deficits and the need for fiscal consolidation are rightly the main themes of the Outlook for obvious reasons. This area of economic management continues to be most difficult and challenging to these countries. The problem owes its origin to high expenditures and low level of revenues and is compounded by increases in generalised subsidies and wage bills. Although the IMF has refrained from commenting on increasing militancy and the need to strengthen defence capability, yet increasing expenditures to meet expenditure requirements under these heads have also been particularly taxing for Pakistan. The IMF has also stated that in order to fill the fiscal gap, governments have mainly relied on domestic bank financing and magnetisation of deficits which have reduced availability of credit to the private sector and fuelled inflationary pressures. Obviously, difficult reform measures are needed to get out of this difficult situation but building a strong public consensus to overcome such a messy situation is not easy. The experience of the new government of Pakistan definitely supports such a conclusion.
However, it needs to be remembered that back-tracking on reform process could be politically easy and convenient for a democratic government but such a route could be very costly for the economic prospects of a country. If financing from multilateral agencies including the IMF is absorbed without implementing the needed reform measures in letter and spirit, it would only delay the inevitable unwinding of the underlying imbalances and require a larger and more painful adjustment in future when financial support may not be forthcoming. The recent EFF agreement with the IMF thus provides an opportunity for Pakistan of a more gradual and less painful fiscal consolidation which should be availed by the country. It would be better for the government to take the opposition parties on board and build a consensus on the agreed reform process for the long-term interest of the economy. Such a route could brighten the prospects of reforms which are essential to rehabilitate the economy.