The government of Prime Minister Shahbaz Sharif may be pleased that the appointment of the next army chief was not controversial and, at least as of now, former prime minister Imran Khan has eased up on his pressure tactics. However, the Damocles sword hanging over Pakistan is the continuing economic crisis and the government needs to get a better handle on the situation.
In a recent piece, former finance minister Miftah Ismail notes that the “the basic problem with Pakistan’s economy” is “the current account deficit. The boom-and-bust cycle of our economy is precisely because we run into a current account deficit every time we try to achieve growth.”
Ismail goes back in history to say that “When Gen Pervez Musharraf imposed martial law in 1999, our exports were 16 per cent of GDP. When General Sahib at long last left, our exports had decreased to 12pc of GDP. In 2007-08 the government kept the rupee propped up to an unsustainable value of about Rs60 to a dollar, sold petrol at a loss, and ran the highest current account deficit in our history.”
When in 2008 “the new PPP government came, it had to devalue the rupee and run to the IMF. Although there wasn’t much that was stellar about its governance except for the Benazir Income Support Programme, the PPP should get the credit that it increased exports to 13.5pc of GDP.”
In 2013, the PML-N came to power and “whereas it did solid work in building energy and transport infrastructure and ushering in CPEC, our exports declined by a debilitating 38pc to only 8.5pc of GDP and we ran the second-largest current account deficit in our history. Again, the issue was a currency pegged to a dollar that highly subsidised imports and made them surge even as our exports were getting priced out.”
Miftah notes “We tried to make amends in the five months I worked as Shahid Khaqan Abbasi’s finance minister through devaluation but the solution lay in the IMF, which could only happen after a new government was formed post-elections.”
However, “the incoming PTI government dithered for a while before agreeing to a new IMF programme. With the advent of the coronavirus pandemic, which the PTI government handled quite well, IMF conditionalities were lifted even as loans kept coming. This allowed it to spend borrowed money without raising tax revenues. The push for unsustainable growth turbo-charged our imports and with export-to-GDP remaining almost stagnant we ran into the third-largest current account deficit in our history. Although in December last year, the PTI government had restarted the much-needed IMF programme, in February, faced with a vote of no-confidence, it opted to sacrifice the national interest for political interest and scuttled the IMF programme, giving unfunded subsidies for electricity and petrol, and another amnesty to business. It was this breaking of the IMF agreement that set in motion the upward trend in our default risk.”
Ismail points out that “When the new government came, we did what we had to do to renew the IMF programme and avoid default. This obviously involved some hard choices and I was relentlessly criticised from all sides. The main criticisms were about our letting the markets decide the rupee-dollar parity, increasing fuel prices and raising taxes. Today, there is a large and persistent difference between the open market and the interbank exchange rates. This suggests that the State Bank is informally guiding banks on the exchange rate. The large difference is also detrimental to our exports and remittances and is encouraging imports. The other criticisms were increasing the price of fuel and imposing new taxes. But should our government be selling petrol at a loss? Moreover, if there are 2.2 million shops in Pakistan and only 30,000 pay income tax, is it not fair to ask them to pay just Rs3,000 per month? Today, our default risk has climbed up again and reached dangerous levels. This risk won’t vanish even after the December bonds are paid off. At the risk of sounding an alarm, I have to say that we have no room left for error. Concrete measures that reassure markets and lenders are urgently needed.”
In conclusion, Ismail warns, “There comes a time when the national interest must prevail over political interest. This is that time. This government will have no right to criticise PTI or anyone else if, having eagerly decided to come in power, it is unable to do what is right for the country.”
