The last week perhaps was the most tumultuous for the new Govern-ment during its first 100 days in office. On 30 November, the State Bank of Pakistan allowed an adjustment of nearly Rs 10 in rupee-dollar parity (from Rs 134 to Rs 144) though it recovered some of the lost ground during the course of the day and is presently hovering around Rs 137-138. Then came the Monetary Policy Committee (MPC) announcement of a policy rate hike by 150 basis points (bps) which many in the market felt was a bit of an over-shooting. These were some heavy duty adjustments by any standards of economic stabilization. Are these moves in the right direction? What ramifications on key economic variables would flow from these adjustments? Were these the prior actions needed for an IMF programme? We try to answer these questions.
The moves are in the right direction, but the sequencing and extent may not be right. The directional correctness is determined by the fact that there is continuing pressure on both fiscal and external accounts and hence both were in need of adjustments to check the persistently high aggregate demand. The concern is whether these measures would suffice to stabilize the economy. Without being part of a coherent reform programme, these disparate measures would not produce the desired effect.
The process of doing isolated and sporadic adjustments is going on since December 2017, when the first exchange rate adjustment was done. During the current year, a total of four exchange rate adjustments have been made amounting to a cumulative loss of Rs.35 against dollar. On the other hand, during the same period, a cumulative adjustment of 425 bps has been made in the process. At the beginning of the year, no one could have imagined that such large adjustments were required, and that despite these adjustments the economy would remain adrift.
The simple reason is that, as in the wake of the present measures, all such efforts had failed to build markets' confidence that they were aimed at stabilising the macro economy. An effective fiscal deficit of 7.0 percent (after excluding revenues from amnesty schemes) and an external account deficit of 6.0 percent, during 2017-18 signaled a clear policy of recklessness. The complementary policies of privatisation, debt management, correction of distortions in administrative prices of gas, electricity and petroleum were missing. Resultantly, rather than correcting imbalances, these episodic adjustments contributed to aggravating them. Reserves were mercilessly depleted while external debts were accumulated beyond reason. In the absence of a comprehensive programme of reforms the necessary impact on stabilization would remain elusive.
Even when we limit our attention to the actions taken during the tenure of the present government, we find a similar state of affairs. The 1Q deficit, a lean quarter, was 1.4%, which, at this rate, would amount to at least 5.6% well above the 5.1% announced at the time of the mini-budget in September 2018. The way debt servicing costs are rising together with some of the sticky demands of expenditures the deficit could well cross 6.0%. On the external side, there is indeed a positive development, but it would be too early to declare victory. The current account deficit was down by a trifle 5 percent compared to a need for at least 50 percent reduction. Even this reduction, mercifully, came from expatriates Pakistanis who sent an exceptional 15 percent more remittances than last year, very likely responding to the calls of the prime minister. Therefore, no visible signs are in witness on the external side correcting due to measures so far adopted. Rather we see the instability continuing to haunt us since the close of 2017.
The third action, namely the reduction in the petroleum prices is not even in the right direction. The government has lost close to Rs 80-100 billion worth of revenues because of fiddling with these prices. For public appeasement, precious tax revenues have been sacrificed when petroleum prices were either decreased, held constant or increased, only by half, contrary to the recommendations made by Ogra and dictated by the revenue estimates provided in the budget. The four months performance of FBR showed a growth of 6.5 percent which is not surprising in view of such major revenue concessions. The provinces would also be hard-pressed for resources as they depend on sales tax on petroleum products, where significant concessions are accorded.
Regarding ramifications that would flow from these measures, we need at least three of them. First, it would have a phenomenal increase on the public debt. During the calendar year, capital loss on external debt amounts to roughly Rs 3.5 trillion. Second, based on the 450 bps increase in interest rate, the additional debt servicing cost debt servicing cost on the budget would amount to Rs 800 billion. Finally, there would a major bout of inflation in the country. The twin measures of policy and exchange rates would neutralize significant part of the benefits of decline in the international oil prices.
We finally turn to the question of whether these are 'prior actions' to seek a Fund programme. We would have been supportive if this was the case. One should recall the 8th October 2018 announcement of the Finance Minister regarding government's decision to seek an IMF programme. This had come on the heels of considerable confusion about new government's economic policy, whether it would be seeking a Fund programme and the market disruptions that peaked on that day as it saw one of the highest single day losses recorded in the history of PSX. Curiously, the following day an equal amount of rupee depreciation was announced as on 30 November. People thought it was a move toward a Fund programme, and a 'prior action' was taken. Alas, it turned out that this was not to be the case. This was followed by a negotiation mission from 7-20 November but it returned without announcing a staff-level agreement.
Two developments, in the meanwhile, were quite helpful to calm the nerves of the markets. The Saud Arabia's package of $6 billion and expectations of an equally supportive package from China. Indeed, while the IMF Mission was here, on return from China it was signaled that country's BoP problems for 2018-19 were already taken care of. However, both these package so far have not been materialized, except a $1 billion deposit from Saudi Arabia with the SBP. Some analysts feel that the nervousness started creeping in. The two actions, in their view, were due more to this nervousness than solid understanding with the Fund.
This is the real apprehension. We are laboring without a reward. We are drifting and wandering. These partial measures would not be acceptable for a full programme. What is worse, by the time we agree to a programme the bar would have risen and demand for adjustment would be more painful. In these pages, for one full year, we have been arguing that there is simply no escape from the need for doing a Fund programme. The earlier we do it the less painful it would be.
(The writer is former finance secretary)
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