It appears that the caretaker team has recognition and realization of gravity of issues and has not triggered the panic button. Some tough yet inevitable steps have been taken. The currency is down by 3-4 percent and petroleum prices have been revised up to manage demand in days of falling import cover and rising oil prices.
The caretakers are doing it right by taking the difficult adjustments themselves, not leaving hard decisions for the upcoming government. In addition, there is some sense of continuity from where Miftah and Abbasi left. In Islamabad, feeling is that that Shamshad and team have been briefed on economic situation by Miftah and the plan charted down by previous regime may continue.
Rumours are that Miftah advised Shamshad to adjust currency by 8-10 percent to reach equilibrium. One round was executed earlier this week; expect another before the elections. Do not be surprised if the currency is around Rs125-127/USD by the time new government assumes office.
On repayment of external debt; FM assured that the country will not default during caretakers’ time as alternate sources of finances are available. These are most likely from none other than China - maturing debt is probably short term China safe deposits and that is going to be rolled over; just as the case of currency swap arrangement.
And even if more debt is required, China may pour in. The strategy is being adopted for past few months - move the currency down in chunks and keep on getting debt from China to stay afloat.
Having said that, more is required from caretakers; as the currency adjustment is inevitable eventuality but the core of the problem is fiscal slippages and high economic demand. The fiscal deficit has reached 6.1 percent of GDP from budgeted 4.1 percent and revised 5.8 percent of GDP. The current account is slipping by $6-7 billion from targeted $8-9 billion in FY18.
Mind you, the fiscal deficit does not include energy (power and gas) circular debts. The petrol prices are up and the perspective was well explained by narrating that the prices in India and other oil importing economies are higher than Pakistan.
This column has repeatedly reiterated that petroleum prices in Pakistan have been kept lower than other oil importing countries for years which has induced unnecessary demand. Finally, someone from the government came up with sound reasoning of revising up petroleum prices. Unfortunately, conventional economists are taking a populous stance to criticize the move.
The need is to further rationalize demand and to bridge the government revenue-expenditure gap. The focus should be on moving up petroleum levy so that federal government gets its due share.
In addition, power and gas prices are to be jacked up. Again, its best that caretakers take the brunt as new government may have to take voters’ wrath if they increase the gas and electricity prices by 15-50 percent. Low prices are not only keeping demand high but more importantly quasi fiscal debt will soon become a pain. It is better to manage it now before it is too late.
The other step to manage demand is by hiking interest rates. When Shamshad was SBP’s Governor, she came up with emergency monetary policy meeting in 2008; a similar step is required now.
Apart from these steps, the caretakers can make a roadmap for new government on how and what to negotiate with the IMF. They should put the economy on to mid-term stability path by taking corrective pricing measures. Some have been taken; more may follow after Eid.
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