The new coalition government, which has inherited an unprecedented macroeconomic crisis, needs to stabilize economic indicators and protect the poor and vulnerable groups by striking a balance between its domestic and international economic priorities. It has to walk a virtual tightrope.
The government seems stuck in the twin challenges — a dilemma — of correcting economic imbalances and saving its vote bank. The decision to continue petroleum products subsidies announced by the previous prime minister in a relief package suggests that politics is dominating the economy.
Apart from the political considerations, policy direction towards devising a clearly defined economic agenda looks hazy. It is not clear what the government wants to achieve on the economic front. The government needs to immediately come out of the indecisive mode and build a consensus among the coalition partners on the tenure of the government and immediate minimum economic agenda before it goes for fresh elections.
That Pakistan finds itself in a macroeconomic crisis yet again is no surprise. In the first eight months of the current fiscal year (2021-22), according to the Ministry of Finance data, the current account deficit (CAD) reached roughly $12.09 billion. It is expected to reach $20 billion by the end of the year, higher than $19 billion witnessed in 2017-18. Before nosediving to an eight-month low of $545 million in February, the CAD for the month of January had been $2.6 billion, the highest since the global crisis of 2008.
The trade deficit surged to $35.52 billion during the first nine months of FY2022, according to data of the Pakistan Bureau of Statistics (PBS), and the State Bank of Pakistan (SBP). It is 170 percent higher than the $20.8 billion deficit in the corresponding period of the previous year.
Pakistan’s debt-servicing stands at $18.5 billion for the current year as reported by the Ministry of Finance. Data from the SBP shows that the foreign exchange reserves are depleting fast, dropping to around $10.8 billion on April 8, from $20.073 billion in August 2021, nine months ago.
This is putting pressure on the rupee. Before gaining back some ground to trade at 181 to a dollar, the rupee had traded at 189 to a dollar, the highest in the country’s history.
The biggest challenge the government faces is controlling the inflation. For months the country has faced extreme inflation. Consumer price index based on headline inflation reached 12.7 percent in March 2022. In January, the inflation had stood at 13 percent, the highest in two years, according to the PBS.
The poor are losing their purchasing power for even basic food items. The sensitive price index, which includes the prices of essential food items, was recorded at 17.87 percent yoy in the first week of April, according to PBS.
As a result of this inflation, the so-called middle-class poverty is on the rise. The standards of living are deteriorating with every passing day. The surging prices are pushing many people to the brink. Not only is this hurting the purchasing power of the people, inflation, particularly food inflation, can also add to the already burgeoning political instability.
The current macroeconomic crisis is perhaps the most severe Pakistan has ever faced. Not only does it pose unprecedented CAD, balance of payments (BoP) and inflation, but the margin for policy tweaks is also limited.
The government must engage with the stakeholders: the political parties in the government and the opposition, development partners, independent experts and the public at large to identify the immediate economic agenda on a priority basis.
When the crisis hit in 2017-18, there was low inflation, low interest rates and the option of going to the IMF. It is different now. The policy rate is already 12.25 percent and still the SBP is behind the curve. The three-month bill rate was 13.50 percent at the last auction suggesting a further hike in the upcoming monetary policy committee meeting.
The inflation is 12.72 percent and on the rise. The best one can hope for from the IMF is to complete its program (if the seventh review goes well). Dr Miftah Ismail, the new economic manager, is already in Washington to engage with the Fund. The lender is likely to push for a reversal of several measures taken by the outgoing government including amnesty and petroleum prices freeze. It is also likely to add new conditions.
The limited policy choices mean a larger marginal adverse impact on the poor and the vulnerable in the society. This, the government fears, can hurt its credibility and cost it votes.
The growing political uncertainty has made the economic crisis more severe. At a time when the country needs a stable government with a clear economic agenda, we have a government still in the making that has yet to clearly outline and convey its economic agenda.
The serious challenges on the economic front require an immediate response. Once the economic agenda is agreed upon by stakeholders, the government shall be ready to make the desirable but difficult choices to correct the external and internal imbalances.
The set of choices will have serious trade-offs. The policies to correct the current account and fiscal imbalances must be implemented in a way that the burden is not shifted to the already suffering poor of the country. This requires a balanced mix of policies that on the one hand corrects these imbalances and on the other hand compensates and protects the poor of the country.
In this regard, the new government needs to develop a consensus on the minimum immediate economic agenda. This is particularly critical for at least two reasons. One, the coalition partners have diverse priorities, agendas and approaches towards the economy. The absence of a common economic agenda, therefore, can delay the relief for the common people. The delay in forming the cabinet highlighted this challenge.
Further, the government, which has to go for elections soon, will be unwilling to take economic policy measures that cost it votes. It has already signaled this in opting to keep petrol and energy subsidies. This, however, will worsen the already deteriorating fiscal imbalances.
Confusion around policy direction can hurt the credibility of the government and the market sentiment. An agreed minimum common economic agenda can help reduce the confusion. In the absence of a clear economic agenda of its own, the government will find it hard to negotiate with the IMF.
The IMF program has been frozen since the previous prime minister announced his relief package. The seventh review is on hold. In the absence of an economic agenda outlined by the government, the Fund will propose unprecedented tough measures which the government might be reluctant to implement in an election year. Therefore, agreement on a minimum common economic agenda is also important to keep the lender engaged.
While the new government is looking for a consensus economic agenda, it’s high time to support it in its endeavor to correct imbalances of the economy without losing sight of the plight of the vulnerable groups.
The government must engage with the stakeholders: political parties in the government as well as the opposition, development partners, independent experts and the public at large to identify its immediate economic agenda on a priority basis so that there is greater clarity and the government can make plans for the upcoming budget.
Overall, the economic agenda must prioritize improving the living standards of the people. This requires making control of inflation a top priority. Further, the government must engage with the IMF without any delay. Social protection policies must be expanded and improved to protect people from the side effects of stabilization measures. Finally, the government must continue and improve good policies of the outgoing government. These could include the Sehat Card, the greater SBP autonomy and the flexible exchange rate.
The writer is a deputy executive director at the SDPI. He tweets @sajidaminjaved. The opinions do not necessarily reflect the institution’s position.