Spearhead Analysis – 21.12.2018
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
“To be, or not to be: that is the question.
Whether ’tis nobler in the mind to suffer the slings and arrows of outrageous fortune,
Or to take arms against a sea of troubles and by opposing end them”. [Hamlet – William Shakespeare]
There are mixed opinions about the performance of the now not-so-newly-elected Government, with skepticism stemming from the constant U-turns and certain dubious decisions, which have done more harm than good. As per the track record of progress for Naya Pakistan the signs are not so encouraging after the first 100 days in power. Perhaps, one of the main reasons is the relative inexperience of the people appointed in key roles and the apparent lack of homework done by those people while criticizing the previous government. It has also become apparent that the Ministers are commenting on and criticizing almost everything, except what they are mandated to do. A policy that has pretty much followed uninterrupted from the previous PML-N Government. The question now is whether things will actually be different in the future – To Be or Not To Be.
There are pressing issues facing the Government, and the foremost is tacking the rapidly declining economy. The Finance Minister tried to recalibrate the FY2018-19 Budget after coming into power, but received a severe back-lash and had to back down on proposals around automobile purchases, real estate transactions and taxation. Not a very august start for the Ministry. This has been followed by an inordinate delay in negotiating a bail-out package with the International Monetary Fund (IMF). The statements from the Finance Minister continue to appear conflicting as the Government wavers between negotiating a package and seeking help from the so-called friendly countries. Under this uncertainty, the reforms proposed by the IMF are slowly being implemented, with the massive devaluation of the Pak Rupee being a prime example. The people have now been informed that there will be mini-budget in January 2019, which would add Rs.190 Billion to the tax burden of the people.
There has been no firm commitment from any friendly country for outright financial help. The Saudis are placing a US$3 Billion Deposit with Pakistan and providing some US$270 Million in relief on oil purchases. The Chinese have linked any further assistance to projects that will be implemented. The UAE and Malaysia apart from some minor trade concessions have not provided financial assistance. Amidst all this the Foreign Exchange Reserves with the Central bank stand at around US$8 Billion. The non-food inflation rate has climbed to almost 10 per cent, while non-food-non-energy (NFNE) inflation is above 8 per cent. The key policy rate has climbed to 10.5 per cent. The Pak Rupee has crossed the Rs.140 threshold and likely to lose further value. All this is translating into lower growth projections for businesses and higher prices for the consumers.
At the same time, we continue to be bombarded with optical illusions with the sale of automobiles, buffaloes, opening up of the Presidency compound for visits by the public, removal of the Governor House wall (an issue taken up by the LHC and work stopped) and a host of other decisions and subsequent rebuttals. At a time when the country needs a firm direction and resolve to implement difficult decisions, the Ministries are involved in completing their homework, losing valuable time and creating further uncertainty for the economic system as a whole.
The rise in Regulatory Duties across a broad spectrum of imported goods combined with higher cost of borrowing and the continued decline in the value of the Rupee has led to a virtual stoppage of imports, including essential items such as medical supplies and medicines. Prices are likely to rise considerably once imports resume and lead to further inflationary pressures and hardship for the people. With the lingering uncertainty there are little to no efforts to devise an import substitution strategy for would be investors as the tax authorities, under pressure to deliver, continue to hound the existing tax payers.
There are a couple of major financial issues looming on the horizon, the foremost being the finalization of a IMF bail-out and stabilization package for the revival of the economy. The second is the resolution of the Financial Action Task Force (FATF) issue where Pakistan continues to be on the Grey List and the deadline is early February and a compliance report due by May. The third is the Karkay and Riko Deq cases in the court of International Arbitration, where Pakistan could be required to pay a considerable quantum depending on the final outcome. The fourth is the stemming of the decline in the value of the Rupee and reducing the burden of taxes on the existing tax payers of the country. All these issues require resolution and a resolve on the part of the government. A failure to resolve or deliver on these issues would carry high costs in terms of financial burden and costs for the country.
The IMF conditions around Rupee devaluation, rate hike, and increased taxes continue to be implemented in a trickle down fashion, while the Government continues to question the acceptance of the programme. This is creating uncertainty which is negatively impacting the economy as evident from the low levels of Foreign Direct Investment and the poor performance of the Pakistan Stock Exchange. In the FATF meeting in June the task force will examine the report to decide whether Pakistan can be taken off the list. Given the slow speed of progress on the money laundering cases in Pakistan and a lack of will to implicate the culprits and resolve the issues around such accounts the message being sent out at the moment does not infuse confidence. If Pakistan fails to resolve the matter it risks landing on the black list, with further adverse consequences for the financial system as a whole.
The Government is completing almost four months in power. They have not taken any real decisive decisions as they contemplate a To Do or Not To Do strategy, which will ultimately decide whether the Pakistan of tomorrow will become a place To be or Not To Be. For now, the economy continues to languish as the Government contemplates the future course of action. It is time that a longer-term view is adopted and policies brought forth to provide robust direction for the future to realize the potential of Pakistan.