Pakistan’s political instability led to unprecedented volatility in economic indicators. — Reuters/file
Political instability has led to unprecedented volatility in economic indicators in recent days.
In March, consumer prices increased by 12.2%. On the external side, the current account deficit widened and central banks’ reserves, as they stand today, can barely cover two months of the country’s import payments.
While reserves held by the State Bank of Pakistan (SBP) fell to $11.3 billion as of April 1, compared to $16.2 billion a month earlier. This dampened overall market sentiment and in the first week of April the currency plummeted to a record low of 188 rupees against the US dollar in the interbank market.
On the budget side, the budget deficit figures in the first seven months of the current fiscal year were worrying.
A deficit of 1.9 trillion rupees has already been registered. This means that borrowing must be increased to handle government affairs for the remainder of the fiscal year. The Federal Revenue Agency (FBR) is no doubt also posting impressive tax collection gains, but these have not matched the expected increase in spending. Already on Monday, the new government announced measures to expand the government’s administration, salary and pension law.
At the moment the central bank has taken the right step.
The SBP forecast an 11% annual headline inflation rate for the current fiscal year and raised its key interest rate by 250 basis points to 12.25%. Among other things, this step will lead to a slowdown in overall economic growth.
Overall GDP growth will also suffer as some cuts in public sector investment are expected to reduce the fiscal deficit.
Before Prime Minister Shehbaz Sharif begins his proposed “Misaq-e-Maeeshat”, several short-term decisions are needed to restore confidence among local and foreign stakeholders and, more importantly, to stabilize key macroeconomic indicators.
First, the country must return to the fiscal prudence it promised in the International Monetary Fund’s (IMF) Article IV consultation and sixth review under the IMF’s enhanced fund facility.
This means reversing the various populist measures, including untargeted subsidies, allowed on electricity, gas and food supplies. Then the various forms of amnesties in the real estate, construction and related sectors must be abolished.
Second, due to government intervention, circular debt has emerged in several sectors. The role of government in these markets, including energy markets, should be reconsidered. And generation and distribution companies must recover the full economic cost from consumers. There is some evidence that lifeline consumers will pay less, but this can only happen if better targeting mechanisms are in place.
In addition, the implementation of a circular debt management plan in the energy sector must be accelerated.
The state-owned enterprises (SOEs) of the energy sector account for a large proportion of the total losses of government agencies, and governance reforms should be a priority for these SOEs. Tariffs in the oil, power and gas sectors must reflect true economic costs. This also implies that subsidies in the energy sector should be exclusively for lifelines.
Reform of this sector will only take root if the overtime regulators – the National Electric Power Regulatory Authority and the Oil and Gas Regulatory Authority – are given due autonomy. In view of the interdependencies, it is important to bring all regulators in the energy sector together.
One of the ways to protect against the energy price shocks is to simultaneously step up efforts to save energy and change the energy mix over time.
Third, there must be a consensus on what import regime the country needs.
Bursts of economic growth lead to higher imports, which in turn leads to unsustainable trade deficits. All governments are guilty of failing to introduce trade taxes and tariffs that support growth and investment in export sectors (and encourage new sectors and companies to become exporters of goods and services). Gains in tariff policies are often canceled out by other inward policies that promote anti-export bias.
Fourth, central bank independence should allow for monetary policy with positive real interest rates and market-driven exchange rates. The government should refrain from turning to the central bank for borrowing needs.
The SBP must ensure the implementation of regulatory and supervisory measures, including strengthening anti-money laundering and countering the financing of terrorism, which in turn will support the exit from the FATF grey-list.
The continued accumulation of foreign exchange reserves is also important to meet the import needs of a growing economy and to protect against global price shocks.
Finally, the new prime minister and his economic team need to listen carefully to disgruntled investors, including the Chinese.
Delays in addressing concerns related to ongoing projects under the China-Pakistan Economic Corridor (CPEC) and Special Economic Zones have impacted the current and anticipated future phases of the CPEC.
The previous government had launched the Pakistan Regulatory Modernization Initiative (PRMI) with the support of all provincial governments – a step that the new government should continue as a matter of priority. This should significantly reduce the bureaucratic effort, reduce the human interface with the supervisory authorities and lower the high (regulatory) costs for established and newly founded companies.
Ahmed is an economist and a former civil servant. He tweets @vaqarahmed.
Comments are closed.