It is the policy that has plunged the Pakistani economy into a state of perpetual crisis
June 16, 2022
ISLAMABAD – THE slide seems unstoppable. The finance minister’s balancing act in the budget failed to end the anxiety. The rupiah’s freefall against the dollar continues as inflation hits a new high. The government’s hopes of sealing the deal with the IMF and the promise of bailouts from friendly countries have yet to materialize. The specter of default stares us in the face.
The government and the opposition seem to agree on the seriousness of the situation but blame each other for the crisis. With the reversal of their respective roles, the narrative also changed. Just a few months ago, while in opposition, the PML-N took to the streets to protest the soaring cost of living and accuse the PTI government of selling out to the IMF.
But now in government, the tenor of the PML-N leadership has completely changed. Inflation is being driven by rising international commodity prices, we are now told. External financial support is considered essential to prevent insolvency. While conceding that rising fuel and electricity prices will fuel inflation, the finance minister argues the measures were necessary to reverse the ravages of mismanagement over the past four years.
Miftah Ismail’s budget speech echoed accusatory rhetoric from PTI finance ministers blaming successive governments for the mess. He promised to get the economy back on track. While warning of difficult times ahead, he pledged to establish “solid foundations for economic development based on sustainable growth”.
It is the policy that has put the country’s economy in a state of perpetual crisis.
It’s a familiar mantra that has also been adopted by previous finance ministers. It is certainly a tall order given the short term of the government. The budget proposals are not very different from the previous ones, except for a certain change of orientation and an adjustment of the fiscal measures.
As a senior PML-N official admitted, the budget proposals reflect the agreement with the IMF reached by the previous government. There are no fundamental structural changes that could ensure sustainable economic growth. The budget document also reveals the predicament of a government trying to meet IMF demands, with an eye on upcoming elections. Given the narrow policy and fiscal space available, there is little room to engage in any structural reform. In fact, it is more about how to manage the economy and avoid an economic collapse.
Most economists consider the 5% growth target set in the budget and the maintenance of the inflation rate at just over 11% to be implausible. It’s about keeping the failing economy afloat with external support. This has been the story of our economic policy over the decades, no matter who has been in power. Any allegation of witchcraft seems outlandish.
Unsurprisingly, in a reversal of roles, the PTI is now yelling, accusing the PML-N-led coalition government of bowing to the dictates of the IMF. Imran Khan rejected the budget, calling it “anti-people” and “anti-business”.
His warning against raising oil and electricity tariffs is no different from statements made by the PML-N and other parties when they were in opposition. The former Prime Minister certainly cannot be held responsible for everything that has gone wrong with the economy, but some of his economic policies and financial measures have certainly made the crisis worse.
During his nearly four years in power, Imran Khan struggled to set the clear policy direction required not only to stabilize the economy, but also to launch much-needed structural reforms. The PTI government has an unenviable record of having four finance ministers in less than four years.
Curiously, when the economy showed signs of stabilizing in the third year, he suddenly brought in a new finance minister – a banker who flip-flopped in policy direction, breaking the course of stabilization . He opted for a growth strategy without taking into account macroeconomic weaknesses. Last year, the PTI government’s budget reflected this new expansionary economic policy. However, most of the fiscal measures were later rolled back under pressure from the IMF. This helped pave the way for a new tranche of the Fund announced in February this year.
The PTI government had agreed to raise oil prices and rationalize electricity tariffs. However, a few weeks after the agreement, the Prime Minister announced a major drop in oil prices and a drop in electricity tariffs.
It was a reckless populist political move on the eve of the vote of no confidence, causing a massive fiscal hemorrhage. This decision could not save Imran Khan’s government but caused irreparable financial damage and made negotiations with the IMF much more difficult.
Even as he criticizes the policy of the current government, the former Prime Minister must also take responsibility for the worsening of the crisis. The PTI can boast of achieving a 6% economic growth rate in the last fiscal year, but this has also worsened the current account deficit.
It was the same situation last year of the previous PML-N government which recorded a similar growth rate, which was accompanied by a balance of payments problem, leaving the PTI government no choice but to s address to the IMF.
It was a vicious circle from which the economy never emerged. Rather, it is a political problem that has put the economy in a state of perpetual crisis. No wonder we have the dodgy track record of approaching the IMF for a bailout 22 times. We rarely finished the program.
There has never been a serious effort to carry out fundamental structural reforms to put the country on a path of sustainable economic growth. We remain largely an aid-dependent rentier economy, with little incentive to break the chains.
The political instability perpetuated by the frequent interruption of the democratic political process has been one of the main reasons for the absence of a long-term reform strategy necessary for sustainable economic growth. There is a need for continuity in the policy. This can only happen if all political forces agree on a fundamental charter of the economy.