Prime Minister Imran Khan in an attempt to calm the jitters subsequent to the erosion of the rupee by nearly 10 rupees in one day advised calm. Reforms including broadening the tax base, actions against money launderers, incentives to revive the closed textile units, and austerity drive will take time to yield results Imran Khan said and warned that the next six months will be difficult.
The Prime Minister is correct in identifying areas of serious concern inherited by his administration however the decisions taken during the past seven weeks are remotely not enough to deal with the prevailing crisis. And the Prime Minister's estimate of six months before a turnaround will be evident is simply not realistic. Multilaterals give two years for an economic turnaround which is contingent on the Khan administration taking some major policy reforms. The Khan administration has been at pains to publicize that reforms are under preparation by several task forces tasked to formulate recommendations to deal with numerous issues with one major proviso: that none of the recommendations is anti-poor. It is unlikely that the works carried out so far by the task forces are taking account of IMF standard normal conditionalities into consideration as the decision to go on the Fund programme is a week-old, and hence the work of the task forces to-date may at best become irrelevant and at worst redundant in the weeks to come as and when negotiations with the IMF team begin. A task force is reportedly looking at ways and means to eliminate the circular debt of the energy sector though as and when the IMF bailout package is extended, it is a certainty that electricity rates would be raised with the objective of as close to full cost recovery as possible - a cost that includes continued mismanagement of the power sector, failure to check theft, rising receivables and interest on loans that continue to be rolled forward.
One may assume the one proviso implies that subsidies would remain in place though it would be a challenge to ensure that they are targeted or limited to the poor and the vulnerable (especially with respect to petroleum prices), total revenue collections rise significantly though without compromising any effort to reform the unfair and anomalous tax structure that has been the root cause of low tax to Gross Domestic Product ratio (as such reforms would take time), and expenditure be slashed and as in the past development expenditure would be slashed as neither the Prime Minister nor his Finance Minister Asad Umar appears to have requested a voluntary reduction in the two major budgetary expenditure items - defence and civil administration.
The basic premise as a country goes on the IMF bailout package, is the ending of the luxury of formulating policies both with respect to budgetary allocations as well as revenue generation. Be that as it may, Imran Khan's advice to remain calm and his acknowledgement that difficult times are ahead were necessary to calm the jittery markets. What is however unfortunate is that the Unites States stock market declined in reaction to the Federal Reserve Board (Fed) raising interest rates, followed by the decline in the stock markets in all major Asian countries the same day Khan made his plea, eroding the possibility of a positive reaction from Pakistani domestic markets. The markets around the world rebounded by the end of the week, however, it is expected that they would remain volatile and perhaps cautious in months to come because of the trade wars as well as interference in regional politics (including the Middle East and with respect to Iran) by the Trump administration.
Much has been said and written on when and what policies the Khan administration must endorse, with some independent economists maintaining that the government should have begun reforms on day 1 after assuming charge as each day's delay has added to the current account as well as the budget deficit. Others have spent a lot of time and newspaper space to lament Federal Finance Minister Asad Umar's failure to hit the ground running given that he had sufficient time to prepare a reform plan as Imran Khan had announced more than a year ago that if his party won the polls Asad Umar would be the finance minister. Surely, they argue with a degree of credibility, as statistical data, both the flawed government data and data compiled by independent credible sources, was available Umar could have begun to formulate a reform package. That neither Imran Khan nor Umar was aware of the gravity of the economic crisis facing the country at the time they took over the reins of government with unsustainable current account and budget deficits is indicated by the delay in seeking an IMF programme or its associated/expected conditions.
The Pakistan Tehreek-e-Insaf government has erred and continues to err on the side of untenable optimism as in accessing billions of dollars from either friends of Pakistan (Saudi Arabia, China and the UAE) reminiscent of views expressed by Asif Ali Zardari during the PPP-led coalition government or the Pakistani diaspora (official remittances, the Prime Minister recently stated, would rise from 10 to 20 billion dollars per annum). This accounts for the Prime Minister's announcement of some pro-poor packages whose implementation maybe delayed or watered down by the IMF team and which include: (i) to build 5 million houses in five years on government land and establish a one-window housing authority which would negotiate a lower than the market rate of interest, that would no doubt make commercial banks wary of engagement as would poor foreclosure laws; however, in the event that these laws are strengthened then in the event of failure to make repayments would the lending bank be allowed to appropriate government land?; (ii) health cards would be issued in Punjab on the same pattern as in Khyber Pakhtunkhwa (KPK). However, the health card was issued in KPK when the Pakistan Tehreek-e-Insaf was not in government in the centre. The Prime Minister needs to think national now and channel money through Benazir Income Support Programme with the beneficiaries carefully selected throughout the country and which is supported by donors including the IMF and defined as a pro-poor programme; (iii) the capacity to limit tariffs and subsidies (including to tube-wells in Balochistan) would certainly be compromised as the country goes on the bailout package; (iv) the flagship projects under the umbrella of the China Pakistan Economic Corridor defined as a game changer for Pakistan, falsely touted by the PML-N administration as investments with complete lack of transparency of projects' modalities, would come under scrutiny with Christine Lagarde saying that the IMF would need to know the extent and composition of the debt, including sovereign debt and state owned enterprise debt, "so that we can actually really appreciate and determine the debt sustainability....if and when we consider a program;" (v) the IMF with greater leverage than during the previous programme would insist on market conditions determining the value of the rupee (likely to be implemented as the country has insufficient reserves to intervene in the market in any case), grant autonomy to the State Bank of Pakistan (which may not be fully exercised by the current Governor who as a retired bureaucrat, a much politicized bureaucrat evident from the positions he held and the flawed orders he endorsed during the Dar years; and (vi) privatization which PTI in general and Umar in particular have opposed in the past.
Imran and Umar do not seem to understand that going on the IMF programme requires adhering to time bound structural benchmarks and failure to do so would lead to non-disbursement of a tranche. And given the state of the economy today coupled with the concerns of Western countries, voiced by US Secretary of State Pompeo, that Pakistan intends to repay loans from China through the IMF package it is a foregone conclusion that the conditions would be harsher than they have ever been before and the quarterly monitoring more rigid than ever before. The outcome: inflation in double digits, growth under 4 percent (that would compromise Imran Khan's commitment to generate employment opportunities, and strikes by SOEs if their privatization is agreed and implemented). Hard times are here to stay for the next two years if not more but, courtesy the PML-N five years, there is no other option.