By the start of next week, PTI would be in power, and the immediate challenge is to take the economy out of woods. It is not going to be an easy job; as tough decisions are required and there is no room for populist measures.
The government has to acquire additional foreign loans despite the rhetoric of making debt free Pakistan. Energy prices are required to move up which is against the PTI agenda of lowering tariffs and petroleum prices. Similarly, seeing the tight fiscal position, new taxes have to be imposed versus the promises of lowering taxation burden.
The challenge in hand is how to keep balance between pro-poor or pro-masses policies and on policies to curtail twin deficits as they both require different kind of policy sets which can be in contradiction to each other.
The modus operandi should be to prioritize goals. The initial days require focus on creating external buffer as to move the economy from the state of living on the edge. The need is to form the right cabinet and have a battery of experts at the helm.
The Finance minister in making Asad Umar is clear on fetching $12 billion of foreign funds, primarily in the shape of debt, in the first six weeks of PTI government. It is pertinent to note that the country can live without the bulk of money envisaged as its happening for the past few months - China has been injecting around $1 billion per month for past few months and that has kept import cover to hover around 2 months.
One way is to let the economy float at bare minimum and rely on China and others to live for month or two and then again look around to get more funds. That is not going to be a good strategy and would not signal stability which is imperative for any reform.
Go to the IMF and other avenues and bring the import cover to 4-5 months and then think of taking steps which can bring sustainability to stability. What takes to sustain the economy without another crisis in couple of years? The need is bring down both current account and fiscal deficits in a way to not let them jump to alarming levels by the end of the government’s term.
The core of the problems is slippages in energy sector and other PSEs, and too much reliance on imports. The trade, energy and taxation policies are to be well coordinated with objective of lowering twin deficit and bringing competitiveness in the economy.
The energy sector needs upward revision of prices to lower the leakages. Both NEPRA and OGRA are pleading for upward revision of power and gas tariffs to plug the circular debt. However, the government may not increase prices immediately; but is has to clear the circular debt in power chain and lower the differential margin recoverable of gas marketing companies. And what is the option the government would have without increasing prices?
The government may invariably issue new paper(s) for one time clearance of circular debt, like Dar did in 2013. And the concurrent step should be to minimize leakage; for this, reforming DISCOs is imperative. A simple strategy should be to let the DISCOs take the brunt of their own losses and build the management capacity in DISCOs to lower the losses.
Here comes the role of the wealth fund and an enriched board to oversee around 200 public sector entities operating under government. Creation of wealth fund is not a problem as accounting treatment is required to bring all the companies including profitable (OGDC, PPL, PSO etc) and loss making (PIA, PSM, DISCOs etc) under one umbrella and let the decisions to be rolled out through competent boards having representatives from private sector and technocrats.
It is of utmost important to create the right board which in turn appoints key management in various companies. The accumulated losses of PSEs are estimated at Rs1.3 trillion and these are growing every year. The goal is to stop the leakages and to restructure the debt of these loans. The question is how the government would inject money to restructure the financials and to turn around the companies.
There are talks of wealth tax; and raising debt from private sector including Diaspora for the wealth fund. In 2014, when KSA gave $1.5 billion to Pakistan a Pakistan development fund (PDF) was created by Dar. But the fate of PDF was no different from any other fiscal fund as it was lost in fiscal black hole. PTI government may need similar bilateral money to put in the wealth fund and the difference should be to use it for the right purpose.
The creating of wealth fund and clearance of circular debt through fetching $12 billon in first six weeks will give breathing space to the new government. But that would be just a start to give some level playing field to PTI economic management team.
They will have 3-6 months to form right policies, issue Diaspora bonds, do taxation reforms, do trade negotiations, activate the key institutions like planning commission and CCI. If the PTI government makes headwinds in the right direction, the Naya Pakistan can move on sustainable growth path. Else, it would be same old repeat of what happened number of times before.