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Can Hafeez Shaikh pull Pakistan out of current economic mess?

Ever before Imran Khan came into power, Pakistan’s economy has been going through tough times. As per the norm the country delayed approaching International Monetary Fund (IMF). According to the latest reports, technical teams of the IMF and Pakistan are locked in negotiations for a bailout package and hope to strike a deal by 10th May 2019.

Adviser to Prime Minister on Finance, Dr Abdul Hafeez Shaikh has expressed hopes that the talks on bailout package with the Fund would turn out to be successful. However, he didn’t mince his words and said that the upcoming budget would focus on attaining sustainable economic growth by addressing two of the contentious issues facing Pakistan, current account deficit and fiscal deficit.

In a sudden but disappointing move, the government announced removal of Governor, State Bank of Pakistan and Chairman, Federal Board of Revenue. These removals came at a crucial juncture when negotiations were held with the Fund and supposedly ‘progressing’ well. Prime Minister also hinted at further changes to his cabinet in the days ahead.

During the tenor of Khan, Pakistan managed to live on foreign exchange contributed by Saudi Arabia, China and United Arab Emirates. However, inflows proved too paltry because there was no corresponding increase in exports and foreign direct investment. Even declining imports and rising remittances failed in bridging the gap.

The standard recipe of IMF mostly comprises of imposing new taxes and withdrawing subsides along with curtailing developmental expenditures under Public Sector Development Program (PSDP). Though, Khan’s government has repeatedly increased interest rate, introduced new taxes and hiked electricity and gas tariffs, the IMF pressure has not eased. It has once again put Khan’s government in a very difficult position by demanding an increase of 25% in power tariff with effect from commencement of next financial year (FY20). The government is also likely to resort to the hike in prices of POL products. Though, the hike would be aimed at increasing cess collection on energy products, it would be attributed to hike in global prices of crude oil.

Pakistan’s trauma continues due to falling foreign exchange reserves. By 26th April 2019, reserves held by SBP decreased by US$219 million to US$8.805 billion, due to external debt servicing and other official payments. Country’s total liquid foreign exchange reserves also declined by US$251 million to US$15.743 billion as compared to US$15.994 billion reported on 19th April 2019. With huge debt servicing on card the country needs an urgent bailout package.

 

The biggest concern is that Pakistan budget deficit is likely to touch record Rs2.7 trillion by the end of current fiscal year mainly due to massive shortfall in tax collection and increase in interest payment. This would be equal to 7% of the gross domestic product (GDP). To bring further insult, Federal Board of Revenue (FBR) collections during the first 10 months of the fiscal year showed marginal growth of 3% posting a shortfall of more than Rs356 billion during July-April period.

The economic managers have further slash down the PSDP spending. The government closed down 12 projects of the ministry of planning, development and reforms, worth around Rs13 billion, including the Vision 2025 project launched by the previous government.

Way forward

If stock market movement can be considered an indicator of the sentiments of investors, the return of foreign investors to Pakistan should be considered a good omen. During the week ended on 3rd May 2019, foreigners emerged as net buyers of US$4.76 million as compared to net buyer of US$9.3 million a week ago. Among local investors, banks were net buyers of US$1.71 million, while mutual funds were net sellers of US$13.4 million. Individuals also emerged net buyers of US$2.2 million. While reversal of the trend just can’t be ruled out, concluding the bailout package would remove the uncertainty prevailing for almost one year.

As per IMF instructions Khan’s government has to accelerate GDP growth rate and boost exports. However, hike in interest rate and electricity and gas tariffs are likely to prove counterproductive. In fact interest rate has to be curtailed and hike in electricity and gas tariffs has to be deferred to bring down the cost of doing business and restoring competitiveness of the local exporters. At present Pakistan has substantial exportable surplus of wheat, sugar and rice. Power plants may also be asked to use locally produced furnace oil rather than imported LNG.

On his recent visit to China, Khan invited Chinese entrepreneurs to take benefits of investment-friendly policies of his government and relocate their industries to the special economic zones being built under the China-Pakistan Economic Corridor (CPEC). It may be pertinent to remind Khan that if local investors are shy, he should not expect foreign investors to come to Pakistan.

Last but not the least; Khan should focus of boosting GDP growth rate. The objective just can’t be achieved because IMF recipe results in cost pushed inflation. Pakistan has to come up with a home grown plan focusing on export led growth. Most of the industries operating in the country are capable of producing exportable surplus. They even do not need incentives, but certainly deserve level playing field though removal of impediments.

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