Unraveling economy

ByAsrar Raouf

Former Civil Servent


June 1, 2023

Unraveling Economy

Asrar Raouf describes the increasing worries for economic planners

Unraveling Economy – Pakistan’s economy is likely to contract this fiscal year and it is feared that the country may default without a further IMF bailout. Though it is acknowledged that Pakistan will meet its external payments for remainder of the fiscal year that ends just in two weeks but rating agency Moody’s has expressed doubts about the ability of Pakistan to meet its financing options after June of this year. Pakistan entered into a $6.5 billion programme with the IMF in 2019 but the programme’s ninth review for the release of $1.2 billion is pending since October last year as the government has been unable to meet some of the pre-requisites set by the lender. The IMF tranche is critical for Pakistan as it will also unlock financing from friendly countries helping Pakistan avert default. The country has been witnessing economic turmoil since last year, with its foreign exchange reserves down to critical levels while talks with the IMF for the release of the pending tranche have remained unsuccessful thus far. It was in February this year that a high-powered financial delegation headed by the incumbent finance minister visited Washington to parley with the IMF at the conclusion of it the finance minister asserted that the staff-level agreement was nearly complete but it has been almost four months since then but the agreement has not been signed as yet.

The coalition government is busy in preparing the budget due to be announced on 9 June 2023 yet contrary to past practices the incumbent finance minister has not approached trade and industry leadership for taking their input for the upcoming budget. The business community is fearful that the forthcoming budget that is expected to be heavily dictated by the IMF will further complicate the economic situation. The business community has reportedly not seen any budget strategy framework that was previously shared by the governments almost four months ahead to review the outline of the budgetary measures. Though the government did ask the businessmen to send their pre-budget proposals but no face-to-face discussions with the financial team, including the FBR, has taken place. The business community has pointed out that it wanted to present and discuss its proposals on industrial, trade, shipping and transportation, taxation, SME, agriculture, IT, monetary and fiscal policies with the government. They mention that budget-making is the opportunity where they can have meaningful course correction based on ground realities, regional and global business environment and national interest and that it is imperative to have detailed discussion about these matters. The community emphasised that the government’s economic and financial team must be crystal clear now that the IMF programme is not going to materialise before the upcoming budget.

The business community has maintained that the only solution that can steer Pak¬istan out of the crisis is indigenous with few basic principles such as simplification and broadening of the tax base rather than squeezing the existing taxpayers and harassment of the business and industry. Moreover, they ask for targeted subsidies to the five export-oriented sectors i.e. textiles, IT, leather, sport and surgical goods in electricity and gas tariffs making it competitive through regionally competitive energy tariff (RCET) mechanism to manage exports earnings due to dearth of dollars. They mention that the government should also encourage remittances by bridging the exchange rate gap between banking channels and open markets and protecting the assets of overseas Pakistanis. They also include steps to incentivise industrialisation, export substitution and revival of sick units and make all economic policies in consultation with real stakeholders.

The way in which wind is blowing is becoming clear when viewed in the backdrop of IMF assertion that Pakistan’s external financing requirements have not been changed in talks with the International Monetary Fund (IMF) over bailout funds. It denied that the IMF is asking Pakistan to raise $8 billion in fresh financing. Lately, the Fund has reiterated that obtaining commitments on external financing from friendly countries would be essential before the IMF approves the release of bailout funds. The United Arab Emirates, Saudi Arabia and China came to Pakistan’s assistance in March and April with pledges that would cover some of the funding deficit. Pakistan has reversed course on implementing a fuel cross-subsidy that had raised concerns at the IMF and it was confirmed by the IMF that Pakistani authorities would not introduce the cross-subsidy scheme in fiscal year 2023 or beyond as IMF views such scheme as typically regressive and prone to abuse.

The official personnel insist that the government is constantly in touch with the IMF and did not want to de-track from the IMF programme. They point out that successive governments have paid heavy political costs for the revival of the IMF programme and that the coalition government is dead earnest to see the programme revived. They mention that the people had given plenty of sacrifices and the coalition government has also paid a heavy price for implementing IMF’s conditionalities and that there is hardly any chance of back-tracking from the programme. They also state that the biggest relief to the people in the next budget would be to control the yawning budget deficit because avoiding further loans as borrowing to finance the deficit would further fuel inflation.

On the other hand it is reported that IMF has mentioned that Pakistan’s Public Sector Development Programme (PSDP) has become unaffordable due to limited fiscal space, as the government again proposed only Rs.700 billion for the development budget for the next fiscal year. In this respect it is mentioned that the IMF has identified loopholes in Pakistan’s public investment management and recommended the measures needed to strengthen it. Despite severe fiscal constraints and a huge backlog of incomplete projects, the report revealed that new projects with a total cost Rs.2.3 trillion were added by government in the last budget. The fiscal squeeze was compounded by the need to make room for flood response measures during the year. The total cost to complete the already approved projects in the PSDP is Rs.12 trillion, against a budget allocation of Rs.727 billion for the outgoing fiscal year. The report added that at the current level of allocation it would take over 14 years to complete just ongoing projects.
In another development it is reported that with the steep contraction in output of large-scale manufacturing (LSM) in March 2023, the prospects for achieving a positive growth figure have diminished and the provisional growth figure may remain negative for the outgoing financial year. The inability to revive the IMF programme has choked the economy whereby the LSM contracted into negative massively so the result will be a halting of economic activities, rising inflation and unemployment. Although it was projected that a provisional GDP growth rate of positive 0.8 per cent in its revised estimates but the latest figures of LSM for March 2023 demonstrate that it remained negative by 25 per cent compared to the corresponding month of the last year. In the first nine months (July-March) period of the current fiscal year, the LSM witnessed a contraction by 8.1 per cent. It is mentioned in this context that the industrial sector had been unable to secure letter of credits due to the country being in a dollar liquidity crunch. It is added that programme continuation with the IMF would have ensured a flow of dollars from multilaterals, bilateral and commercial monies to ease the imports and unclog the economic activity. The Weekender


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