Last week, CFA Society Pakistan conducted a seminar in Karachi where two former Deputy Governors of State Bank of Pakistan (SBP) were invited and they candidly discussed the exchange rate and monetary policy outlook and sustainability of the government debt.

They both argued that the interest rate is on a downward trajectory, and no one sees any sharp depreciation in the currency.

While both disagreed on the pace of the adjustment, the consensus view is that the economy is moving towards a painful stabilization phase.

Murtaza was of the view that Pakistan’s public debt is not sustainable and it needed restructuring. Meanwhile, Riaz believed that the situation was bad, but manageable, given that fiscal prudence continued.

They both agreed that the origin of Pakistan’s macroeconomic problems was fiscal and without addressing the structural imbalances the country could not move on the much-needed high growth path to generate jobs for growing young population.

The thorny issue that needed deliberation was on the restructuring of both domestic and foreign public debt. Murtaza presented some strong points in favour of it.

According to him, neither the government (and SBP) nor the IMF would say about the imperative for restructuring. And he never expressed his concerns publicly while he was employed by the SBP.

Pakistan must run fiscal surplus for many years to make the debt sustainable, and the socioeconomic cost of it would be too high for the people of Pakistan to bear. The current fiscal year budget is a manifestation of it. The government is testing the limits of those being taxed. There are risks of social unrest and perhaps FY25 is not the first or the last year where newer harsher measures are being taken.

There are risks of social unrest moving forward as rising consumer prices due to higher indirect taxes and extremely high direct taxes on salaried and non-salaries individuals are testing patience of middle and lower-middle class. Is the policy of running primary surpluses for years of any worth? This question should be deliberated and discussed widely.

In other words, there is a trade-off to stay between 0-2 percent GDP growth and limit the current account deficit within 1 percent of GDP for the foreseeable future versus contraction in the short term (due to debt restructuring or reprofiling) followed by a sustainable high growth path.

In Murtaza’s words, there is a clear choice between the two and the government must opt one for the people. What he did not mention is the political economic dynamics where a government that was purportedly formed on ‘Form 47’ made such tough decisions for the people that did not vote for them. Anyhow, he initiated a debate which should be deliberated on mainstream media, social media, and economic policy making circles.

There are good examples of debt restructuring which Pakistan can learn from. The country needs debt reprofiling primarily where net present value (NPV) of the loans to alter without taking any haircut or risking the deposits of population at large in commercial banks.

The country needs a breather. Business as usual is very painful. The socioeconomic indicators such as access to education, health, clean environment, security, economic productivity and GDP per capita are all moving in the wrong direction.

However, mere debt restructuring won’t cut it. The country did it in 1998 and after a short spurt of growth, the economy had moved back to the unsustainable path. The problem is that fixation to the stable exchange rate and practice of running bad fiscal policies should end. That did not happen after the 1998 restructuring.

After the 7th NFC award and 18th amendment, the fiscal framework has become completely lopsided, and it requires a complete overhaul. The space to do so is simply missing due to higher debt servicing.

And then as the World Bank economist at the event rightly pointed out that the quality of the public sector spending is poor, which is exacerbating the problem.

Thus, not only fiscal space is required to be built but also the quality of spending must improve to ensure better productivity in the future. These are easier said than done.

But the country is reaching an inflection point where without taking some radical and bold steps, the recovery is not anywhere in sight.

Copyright Business Recorder, 2024