ARTICLE: As the PTI Government completes its two years in office there are some stunning successes in the fight against the Corona pandemic and some early signs of spring in an otherwise harsh economic environment. Pakistan's politics and economics as usual are revolving around the fallout of our perennial debt problems, IMF programs and day to day economic management. We are the most persistent user of the IMF facilities having availed services of 22 programs since 1950 to cope with our debt problems. In the last decade we have exited from a failed program in 2011, we have finished a successful one in 2016 and started a new program in 2019.
Our public debt increased from around Rs 4.8 trillion in 2007 to Rs 44 trillion in 2020. (54 percent of GDP in 2007 to around 100 percent of GDP in 2020).This accumulation of debt lies at the roots of our problems. So, how did this public debt increase by nine times without a commensurate increase in the size of the economy. To understand this phenomenon and our predicament, we have to trace what happens to our economic management when we are not in an IMF program.
Recall that the PML N government concluded a $ 6.64 billion EFF program with the IMF in 2013.Christian Legarde, the Managing Director of the IMF, visited Pakistan at the conclusion of the program in 2016 and congratulated the government for successfully completing the program but she also took the opportunity to forewarn that was prophetic:
"In my discussions, I emphasized the need to continue strengthening resilience by building fiscal and external cushions to be adequately prepared for future economic shocks. Achieving higher and more sustainable growth will also require completing important structural reforms in the energy sector, and tax policy and administration; ending losses in public enterprises; and making a sustained effort to improve governance and foster a dynamic and export-oriented private sector. In parallel, added focus on strengthening health, education, closing the gender gap and providing social protection can ensure that gains in living standards are widely shared".
Unfortunately, the government eyeing elections, was in no mood to follow the IMF advice, instead It went on a spending binge whose bills, we are still struggling to pay off.
Starting with the power sector, a huge expansion in thermal generation capacity was done through a defective IPP model devoid of any competition and based on unusually bloated upfront tariffs. These tariffs were almost twice the tariffs being paid by neighboring countries. The transmission and distribution system was neither upgraded nor reformed. Signing inflated Take or Pay contracts without removing power sector inefficiencies, leakages and theft was a big mistake. This decision led to unaffordable consumer tariffs, ballooning of circular debt and crippling of the competitiveness of Pakistan's economy. An unsustainable power sector was left for future governments to sort out.
As far as overall economic reforms suggested by the IMF were concerned, the Government seemed least interested in them. As a result economy was mired in red tape with a poor investment climate, a regressive tax system, poor human development indicators and limited levels of social services and security nets. This was reflected in our abysmal 2018 global rankings in numerous development indicators involving ease of doing business, human development index and competitiveness index. By 2018 Pakistan was comparable to the worst performers in the world.
At the macro level, Exchange rate policies were followed that encouraged imports and crippled exports. By 2018 the trade deficit had crossed $38 billion, public debt had crossed Rs 25 trillion. This quickly crystallized into the worst economic crisis in the history of Pakistan, encompassing gross external financial gap of around Thirty billion dollars, hugely exceeding the official reserves of the country. This brought Pakistan down on its knees with possibility of imminent default and impoverishment of its people. Unfortunately this was the legacy bequeathed to the nation by PML-N's five years in office.
PTI had long campaigned on an agenda of change that promised a reform oriented neat and clean government, ruthless accountability, millions of new jobs, housing for all and focus on people centric development instead of unviable razzle dazzle projects. Expectations were sky high that it would immediately usher in an era of change for the better.
Instead, on August 18, 2018 when Imran Khan was sworn in as the 22nd prime minister of Pakistan he was confronted with a Hobson's choice of either immediate default and a total meltdown of the economy or a draconian 22ndIMF program designed to stabilize the external hemorrhaging. An IMF Program meant that even before the ink would dry on his signatures on the dotted line, the debt would explode, like a landmine and increase by trillions of rupees driven by devaluations and payment of past bills. In addition, the people would bear the full brunt of the fallout of the fund program in terms of steep inflation, higher taxes, higher electricity tariffs, income and job losses totally in conflict with the objectives of the PTI government.
This was a very hard pill to swallow for the new government and for almost a year it frantically tried to raise the needed cash from friendly countries to avoid an economic crash. But in spite of massive support from Pakistan's friends and stringent home-grown measures and adjustments Pakistan still needed the certainty inherent in support of the International financial system.
On July 3, 2019, the International Monetary Fund (IMF) announced the approval of a 39-month Extended Fund Facility (EFF) amounting to SDR 4,268 million.The approval more importantly also unlocked new financing from international partners and agencies of around USD 38 billion over the program period; an amount sufficient to meet Pakistan financing needs during its economic recovery phase.
After the start of the IMF program, Pakistan has met the quarterly performance targets set by the IMF. It has been able to slash the current account deficit to negligible level, it has weathered a tsunami of inflation, it has stabilized the rupee at around 167 rupees to the dollar. The exports have started their long journey towards growth, reserves are building up, interest rates have peaked and recently been slashed, investment is recovering.
CPEC has been moved into a new phase that comprises investments in agriculture, manufacturing and services sectors. Long delayed mega water projects have been started. A very favorable FTA has been signed with China which gives Pakistan unprecedented access into the vast Chinese market. Trade relations with the European Union and the United States have been strengthened and the economy has started moving back from the edge towards recovery with investment opportunities for both export promotion and import substitution.
(To be continued tomorrow)
Copyright Business Recorder, 2020