One complete year has passed since the elected government assumed power. At the time, the economy seemed well balanced, and progress was being made in every sector. The adverse effect was that of oil prices which kept on climbing to unprecedented heights. Macroeconomic indicators such as fiscal and current account deficit, core and non-core inflation, forex reserves, monetary expansion, all seemed heading in the right direction. Investor’s, public and stake holder’s confidence in the economy were reasonably balanced. When the elected government took over, the expectations, for understandable reasons, were high. How far the government has succeeded in meeting public expectations and concern of stake holders in the economy is one way of looking at the performance of the government.
The state of the economy prior to imposition of emergency, on 3rd November 2008, according to some of the analysts were still sound. Foreign inflows were intact, forex reserves were robust at around $16.0 billion, US$ and rupee parity stood at Rs60.0 per US$, reflective of stable currency.
Imposition of emergency, by the then government, created political uncertainty and that in turn put the pressure on the economy. Sequence of events resulted in holding of general elections on 18 February 2008. This brought in a lot of confidence among the stakeholders hoping to see a new era of economic stability to begin. But things started going wrong from the very beginning. The interim government particularly with reference to borrowing from the SBP between November 2008 and March 2009 to meet fiscal needs on one hand and reluctance to increase prices of petroleum products for domestic consumers for politically expedient reasons on other hand did quite a bit of damage to economy. Later on, by mid-2008 surge in oil and food prices in international market ensured a sort of economic melt down and high inflation hardly witnessed before in economic history of the country.
The challenges and response
There were three economic challenges that the elected government encountered right from the day-one of assumption of power. They were to reduce fiscal and current account deficit, contain inflation and win back confidence of domestic and international investors. The latter was essential to keep momentum of economic growth going that had slowed down from second quarter of fiscal year 2008.
Irrespective of any of the measures that the government must have planned to address economic challenges, political stability was imperative. Soon after assumption and formation of coalition government at the centre and in the largest province of the country, the Punjab and elsewhere in smaller provinces, there was at least an illusion of political stability. But, the hopes were dashed when within a few weeks of forming coalition by the two largest political parties, the coalition at the federal government level stood dissolved. The exercise of diagnosing economic challenges and addressing them in politically stable environment was back to square one with the change of guards of ministry of finance. The half-backed effort made by it was quite conspicuous in very optimistic targets such as achieving growth rate of 5.8 per cent, were obvious in the budget estimates. Economic vision of the government still remained blurred and it opted for yet another change of guards for national economy by bringing in the present incumbent, advisor to the PM on finance, Shaukat Tareen.
The change of guard at least helped the government to articulate the real issues faced by the economy and their probable solutions that according to the advisor to the PM were possible by increasing tax-to-GDP ratio that was abysmally low 9.8 per cent by end of last fiscal year, reinvigorating industrial and agriculture sector production and providing good economic governance. The advisor’s plan to get financial assistance from friends abroad ultimately boiled down to getting cheap credit from IMF. It materialised in November 2008 with a package of $7.6 billion and a host of stringent macro-economic bench marks aimed at achieving macroeconomic stability even if it has to be at the cost of slow down of national economy.
IMF assistance became necessary to come out of the looming foreign default somewhere in February/March 2009. The fiscal and monetary bench marks that were mutually agreed between the IMF and the GoP despite their being tough were achievable but the course adopted by the government could have been better; public-friendly rather than non-friendly as is the case at present. Let us take the example of reducing fiscal deficit from last year’s 7.8 per cent to 4.2 per cent. The reduction is steep keeping in view tax revenue collection of Rs1.25 trillion increased to Rs1.36 trillion on IMF suggestion. The government has solely depended on reducing development expenditure and withholding the benefit of fall in oil prices in international market to the consumers. It shunned reducing non-development expenditure to the desired level with the result that the twin measures slowed down the economic growth and still there was no reduction in inflation. According to latest estimates given by IMF and UNDA, economic growth would be 2.5 per cent.
Economy is not benefiting from the spirit of IMF conditionalities that is to achieve macroeconomic stability through structural reforms. Inflation has relented by around 400bps between October 2008 and February 2009 whereas core inflation has stayed stubborn at 18.0 per cent during the same period. Secondly, the government and SBP have not succeeded to reduceing bank spread from 7.4 per cent to around universally accept 3.5 per cent for the commercial banks. The banking sector earned a profit of Rs50 billion during last calendar year. It is fairly high keeping in view the state of banking sector in developed countries and slowing down of national economy.
Ray of hope
Despite pursuit of ad hoc measures by the government to achieve macroeconomic stability and satisfy IMF to ensure that the bail out package remains in tact, there is a ray of hope to achieve a few positive results for two specific reasons. One, during the past few months there has been substantial fall in the prices oil and food items in the international market. This is likely to have a positive effect on trade and current account deficit. Current account remained surplus during the month of February after a long spell of current account deficit. Secondly, the market forces have played an important role in bringing down the interest rate. There are strong indications that discount rate would be reduced between 200bps and 300bsp in the forthcoming monetary policy. IMF also seems to appreciate the point that continued high discount rate is producing counter-productive results.
IMF bail out package and US concern to strengthen Pakistan’s economy by increasing economic assistance to Pakistan by three times of what is being provided at present primarily with the objective of combating extremism and militancy in the country
During past one year the economy under the government has remained stuck with political instability, short on provision of utilities particularly gas and electricity and least focus on socio-economic problems faced by the general public. The vision to address economic issues has been lacking and there has been more dependence on promises and foreign inflows than doing some thing real and concrete to turn around the economy. Support of international community to the government to turn economy is solid but how to make the best use of it remains to be seen. The opportunity should not be lost in the maze of domestic politics and lack of vision.