JThe new coalition government, which inherited an unprecedented macroeconomic crisis, must stabilize economic indicators and protect the poor and vulnerable groups by striking a balance between its national and international economic priorities. He has to walk a virtual tightrope.
The government seems stuck in the double challenge – a dilemma – of correcting economic imbalances and saving its vote bank. The decision to maintain the oil product subsidies announced by the previous Prime Minister in a relief package suggests that politics is dominating the economy.
Besides the political considerations, the political direction towards the development of a clearly defined economic program seems unclear. We do not know exactly what the government wants to achieve economically. The government must immediately exit from indecisive mode and build consensus among coalition partners on the government’s mandate and the immediate minimum economic agenda before proceeding to new elections.
That Pakistan once again finds itself in a macroeconomic crisis is no surprise. In the first eight months of the current fiscal year (2021-22), according to data from the Ministry of Finance, the current account deficit (CAD) reached around $12.09 billion. It is expected to reach $20 billion by the end of the year, higher than the $19 billion seen in 2017-18. Before dropping 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 2008 global crisis.
The trade deficit soared to $35.52 billion in the first nine months of fiscal 2022, according to data from the Pakistan Bureau of Statistics (PBS) and the State Bank of Pakistan (SBP). It is 170% higher than the deficit of $20.8 billion for the corresponding period of the previous year.
Pakistan’s debt service stands at $18.5 billion for the current year, according to the finance ministry. Data from the SBP shows that foreign exchange reserves are rapidly depleting, falling to around $10.8 billion on April 8 from $20.073 billion in August 2021, nine months ago.
This puts pressure on the rupee. Before regaining ground to trade at 181 to the dollar, the rupee had traded at 189 to the dollar, the highest in the country’s history.
The biggest challenge facing the government is controlling inflation. For months, the country faced extreme inflation. The consumer price index based on headline inflation reached 12.7% in March 2022. In January, inflation was 13%, the highest in two years, according to the PBS.
The poor lose their purchasing power, even for basic foodstuffs. The price sensitive index, which includes prices of essential food items, was recorded at 17.87% year-on-year in the first week of April, according to PBS.
Because of this inflation, so-called middle-class poverty is on the rise. The standard of living is deteriorating day by day. Soaring prices are pushing many people to the brink. Not only does this harm people’s purchasing power, but inflation, especially food inflation, can also aggravate already incipient political instability.
The current macroeconomic crisis is perhaps the worst Pakistan has ever experienced. Not only does this pose unprecedented CAD, balance of payments (BoP) and inflation, but the room for policy adjustments is also limited.
The government should engage with stakeholders: political parties in government and opposition, development partners, independent experts and the general public to identify the immediate economic agenda on a priority basis.
When the crisis hit in 2017-2018, there was low inflation, low interest rates and the possibility of going to the IMF. It’s different now. The policy rate is already at 12.25% and the SBP is still behind the curve. The three-month bill rate was 13.50% at the last auction, suggesting a further rise at the next meeting of the monetary policy committee.
Inflation is 12.72% and rising. The best we can hope for from the IMF is to complete its program (if the seventh review goes well). Dr. Miftah Ismail, the new economic director, 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 the amnesty and the oil price freeze. It is also likely to add new conditions.
Limited policy choices mean greater marginal negative impact on the poor and vulnerable in society. This, the government fears, may damage its credibility and cost it votes.
Growing political uncertainty has aggravated the economic crisis. At a time when the country needs a stable government with a clear economic program, we have a government still in the making that has not yet clearly defined and transmitted its economic program.
The serious challenges on the economic front demand an immediate response. Once the economic agenda has been accepted by the stakeholders, the government must be ready to make the desirable but difficult choices to correct the external and internal imbalances.
The choice set will have some serious trade-offs. Policies to correct current account and fiscal imbalances must be implemented in a way that does not shift the burden to the country’s already suffering poor. This requires a balanced combination of policies that, on the one hand, corrects these imbalances and, on the other hand, compensates and protects the country’s poor.
In this regard, the new government must develop a consensus on the minimum immediate economic program. This is particularly critical for at least two reasons. First, coalition partners have varying priorities, agendas and approaches to the economy. The absence of a common economic program may therefore delay the relief of ordinary people. The delay in forming the cabinet highlighted this challenge.
Moreover, the government, which is due to go to elections soon, will not be willing to take economic policy measures that will cost it votes. She has already signaled this by choosing to retain gas and energy subsidies. This will, however, aggravate fiscal imbalances that are already deteriorating.
Confusion around policy direction can hurt government credibility and market sentiment. An agreed minimum common economic program can help reduce confusion. Without a clear economic agenda, the government will find it difficult to negotiate with the IMF.
The IMF program has been frozen since the previous prime minister announced his relief package. The seventh review is pending. In the absence of a government-defined economic program, the Fund will propose unprecedented tough measures that the government may be reluctant to implement in an election year. Therefore, agreement on a minimum common economic program is also important to maintain lender commitment.
As the new government seeks a consensual economic program, it is high time to support it in its efforts to correct the imbalances in the economy without losing sight of the plight of vulnerable groups.
The government must engage with stakeholders: political parties within government as well as the opposition, development partners, independent experts and the general public to identify its immediate economic program on a priority basis so that it there is more clarity and the government can make plans for the next budget.
Overall, the economic agenda must give priority to improving the standard of living of the population. This requires making inflation control a top priority. In addition, the government must engage with the IMF without delay. Social protection policies need to be expanded and improved to protect people from the side effects of stabilization measures. Finally, the government must continue and improve the good policies of the outgoing government. These could include the Sehat card, the greater autonomy of the SBP and the flexible exchange rate.
The writer is Deputy Director General of the SDPI. He tweets @sajidaminjaved. Opinions do not necessarily reflect the position of the institution.