The PTI government is about to move its second supplementary budget without having completed even a full year in power. The second mini-budget lays bare an ad-hoc economic policymaking.
This tells the nature of decision making in this new government is constrained. And since our foreign and economic affairs are increasingly the same in so far as policy goes, it is not easy to hope for improvement any time soon.
Federal Minister for Finance Asad Umar—ostensibly the driver of our economy—had assured after the passage of his first supplementary budget that the fiscal crisis was over and now his government’s focus would be on overcoming the external sector crisis. Now he says it has been recommended by the Economic Advisory Council.
The government cannot wait for longer as the poor performance of the Federal Board of Revenue (FBR) has forced the government’s hand. The political cost of such immaturity is surely going to be heavy. And if the government had any choice, it would not have agreed to the pace of changes suggested by the International Monetary Fund (IMF). The inflationary trends would make life difficult for the ordinary people as riots could break out, Pakistan Peoples Party (PPP) Senator Sherry Rehman, a member of the standing committee, suggested while commenting on the finance minister’s briefing. “At a time when it is extremely difficult for the poor people to meet both ends, questions will be raised about which international agency has directed to bring the mini-budget,” she said.
Although Mr. Umar displayed an unjustiable bravado when he said, “I will not bank on IMF alone and part of the reason is the political consequence.” Yet, all he is saying is to delay what he also knows is inevitable. Governor State Bank of Pakistan Tariq Bajwa said “Since November, the SBP has adjusted the value of the currency six times and every time it has been done in consultation with the federal government,” said Bajwa. This amounts to the biggest fiscal and monetary adjustments any government has carried out while still outside the IMF programme.
The narrow technical focus on the current account deficit tells there is no clear strategy for the government to follow besides seeking more loans. The PTI government has already contracted an additional $12 billion dollars in loans and boasts of not being in any hurry for an IMF programme, said the minister. Yet, the way they are moving for another supplementary budget gives a lie to their own bravado. This is not to mention at all the egg on their political faces.
Pakistan remain’s desperately in need of support to streamline its balance of payments future. The memorandum of economic and financial policies (MEFP) the finance minister submitted to the IMF last week has not been very well received, it appears. The document filed with the IMF is titled: “Pakistan: Stabilisation and Medium-Term Sustainable Growth Framework”.
Media reported IMF is asking to know more on the proposed fiscal adjustment, energy pricing, monetary and exchange rate policy and structural reforms mentioned in the government’s MEFP. Obviously, the government’s case is still not palatable for the IMF officials. Adding insult to the injury, IMF has been persistently asking questions over the way forward on the state-owned entities. Or in simpler words, when does the PTI government plan to auction more of the family silver?
The IMF wants immediate policy action on both the fiscal as well as the structural issues while the government wants to spread these over the next three years.
The balance of payments crisis has been averted in this fiscal year but IMF would want to know the government’s financing plan for the next year and beyond. Tweaking rates of levies hardly helps an economy, or dole from friendly countries for that matter. The Saudi oil facility would become operational next month relieving the government from monthly expense of US$ 274 million. This means Saudi Arabia will lend us $4.5bn for balance of payments’ support during the current fiscal year. Another loan is expected from the United Arab Emirates now being negotiated in the final stages.
In absolute terms, this round of economic adjustments would create more than Rs1 trillion of additional fiscal space with a combination of increased revenues and reduced expenditures. The government must reduce current addition of Rs30bn per month in the energy sector circular debt and bring it to zero within first two years of the IMF programme.
Changed geo-political circumstances warrant the country must have bankable fiscal and monetary plans that could advocate with the IMF mission and beyond. The IMF is playing tough especially on monetary policy independence. Inflation targeting will have to born another couple of years. It is, therefore, interesting to note the Asian Development Bank (ADB) refused to finance the China-Pakistan Economic Corridor (CPEC) railway project linking its budgetary support to Islamabad will remain contingent upon the IMF giving an economic health certificate to the federal government.
The ADB excuse is nothing more than an excuse. The bank is an international financial institution and claims it “cannot become part of any bilateral initiative like the CPEC”, ADB Strategy, Policy and Review Department Director General Tomoyuki Kimura said while speaking to journalists during his two-day visit to Pakistan. The ADB is dominated by Japan and the United States, while China has a limited influence. ADB noted “there were common objectives between [the] CPEC and Central Asia Regional Economic Cooperation (CAREC) initiatives. However, the backing out of ADB from the railway connectivity belies how strong Japanese interest in the ADB are. At an estimated cost of US$8.2 billion, the ML-I is a very expensive mega project and the Japanese would certainly not want their own money to finance Chinese initiatives in Pakistan.
This is a political crisis in need of a political solution. Nearly 50 million Pakistanis still lack access to grid electricity. Power distortions cost Pakistan’s economy much more than previously estimated: $18 billion in fiscal year 2015—that is 6.5 per cent of the country’s economy. Pakistan has achieved a lot of progress in expanding its electricity access and production. Pakistan now ranks 115th among 137 economies for reliable power. Power distortions cost Pakistan’s economy much more than previously estimated: $18 billion in fiscal year 2015—that is 6.5 per cent of the country’s economy.
The World Bank has recently released a report on poverty in South Asia titled, “Connecting all of Pakistan’s population to the grid and increasing the supply of electricity to 24 hours a day would increase total household income by US$4.5 billion a year and will also help the business avoid $8.4 billion in losses. This makes the power sector reforms the top priority for Pakistan. It can yield huge economic gains toward a more sustainable future. Yet not only has the crisis of circular debt has kept on growing, it has now started threatening the continuity of Chinese thermal power projects under CPEC as the government has failed to make their payments in time.
It is a test for the government to come up with a plan so innovative and robust, that the new government is able to deliver upon some of its election promises.
Khalid Hussain is Resident Editor of TLTP – You may contact Khalid Hussain at Resident.Editor@tltpnews.com.pk
The Law Today Pakistan, commonly known as TLTP, is the largest news wire service, headquartered in Islamabad. The service is providing fast, comprehensive and verified news on superior courts adjudications, regulatory framework of fiscal, monitory and external sectors, economic regulatory bodies amid apex institutions regulating the financial system. TLTP is empowering readers of more than 12 national English dailies in the country.