Pakistan's challenges

Credit Suisse in a recent report maintains that Pakistan's economic challenges are greater than Egypt's. That is certainly true given that unlike Egypt we have generated little if any international tourist inflow in spite of Prime Minister Khan's focus on attracting tourism, have not exploited our natural resources, for example, exploiting Reko Diq reserves remains shrouded in uncertainty, and last but not least we export our surplus and have yet to develop a manufacturing base dedicated to exports.

Serious widespread concern over the state of the economy has been much in the news in recent months. There is increasing discontentment within the general public as incomes continue to erode with food inflation over 25 percent, due partly to mismanagement and partly to the rupee depreciation, as well as the steady rise in utility rates in compliance with the economically feasible and therefore salutary International Monetary Fund (IMF) condition of achieving full cost recovery. The political government has reacted to public sentiment by announcing higher subsidies to the Utility Stores Corporation (USC) however a larger portion of the population that resides in rural areas would not benefit from this measure - a factor that explains why inflation is higher in rural areas. Additionally, it is unclear whether there is a limit to the amount purchased by a single individual/household or whether like in the past, bakeries and hotels collude with the USC staff to buy in bulk. The government also announced that it would freeze utility rates in an effort to appease households and businesses.

While holding no brief with IMF conditions, its reported stance can be supported because it has shown flexibility in lowering the tax revenue target by 12 percent (just not by 17 percent) and has not agreed to a massive escalation in circular debt through keeping prices constant without improving governance. And indications are that while talks on the second review are inconclusive yet it is believed that it is not a breakdown of talks and engagement with the Fund is intact. It must be borne in mind that the Fund suspended its programme with two tranches remaining in 2010 during the PPP administration's tenure - a suspension that led to the cessation of all programme assistance/budget support from multilateral and bilateral sources with the government increasing reliance on domestic borrowing notably from the SBP.

Today the situation is markedly different. Staying in the IMF programme is an imperative to ensure that the 3 billion dollar carry trade or so-called hot money inflow due to the attractive discount rate does not exit the country thereby eroding foreign exchange reserves, the buffers not withstanding and other multilaterals do not stop budget support. It would be fair to say that the government would be hard-pressed to meet its foreign interest/loan repayments on schedule if the Fund programme is abandoned.

Unlike in 2010, China is heavily investing in Pakistan under the China Pakistan Economic Corridor with the focus shifting from physical to social infrastructure projects and the country has a one year deferred oil facility from Saudi Arabia. The government would have to incur more subsidised loans, from between 12 to 14 billion dollars a year for the next three years from China, whose repayment schedule would have to be adjusted to the long-term and the deferred oil facility would need to be extended to three years instead of clearance of all dues by the end of one year to be eligible for deferred oil payment the next year. And the government would need to massively slash its current expenditure, especially current expenditure, which has risen by more than 40 percent in the current year compared to revised estimates of the year before. Difficult, if not impossible, and when seen in light of the legitimate demands of the IMF during the second review talks one would hope that differences, if any, would be resolved amicably.