Hard Times

Spearhead Analysis – 15.10.2018

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

“Do the wise thing and the kind thing too, and make the best of us and not the worst.” [Charles Dickens, Hard Times]

It is finally official. The PTI-led government after much deliberation has approached the International Monetary Fund (IMF). While this decision is contrary to the tall pre-election claims of Imran Khan, it was the only real option available to the new Government. In the process valuable time was lost as other frivolous options were explored with no apparent clear strategy in mind. IMF now appears to be a lender of the last resort for Pakistan, and the Fund would be in a strong position to dictate their terms to a severely beaten economy. There is no argument over that fact that Imran Khan and his coterie of Ministers have inherited a system that is not of their own making, but one that they did get the mandate to set right. It is an enormous responsibility that will require hard choices and objective decision making to right the wrongs of the past many years. And yes, there is no magic wand for bringing about an overnight change. The people are in for Hard Times ahead and they need to be convinced that this could be an opportunity for the ‘change’ that they all so much want. The Government also needs to understand that they must provide robust plans and strategies to right all the wrongs of the past many regimes.

Prior to approaching the IMF, some hard decisions have been taken by the Government after initially issuing denials of price rises:

  • The natural gas prices were increased by up to 143% to recover Rs.94 Billion from consumers, in effect slashing consumer subsidies that were a fiscal drag on the government’s budget.
  • The electricity prices were raised by Rs.1.16 per unit.
  • The Rupee was allowed to plunge by around 8% in a single day as it tested new lows.

The Finance Minister Umar after his meeting with the IMF has categorically stated that they would have to take difficult decisions that would be painful for the people but are necessary under international commitments to get out of the current economic situation. It is also a fact that the Finance Minister has stated in front of the media that the ‘economy in undergoing a by-pass operation’. Other Ministers have stated that Pakistan is ‘bankrupt’ and that the Rupee would go the Rs.140 level against the US Dollar. Hardly, confidence-inspiring statements at a time when Pakistan needs to attract investment and improve investor sentiment. To top it all the Prime Minister has categorically stated that he would go after the corrupt, criticizing the ‘lethargic’ attitude of the National Accountability Bureau (NAB). His speech led to the single largest drop on the PSX of 1,400 points, sending the government into panic mode.

The Government has been quick to implement decisions focused on optics such as the sale of Buffaloes and Cars, downsizing of staff at the Government Houses, and the opening up of the State Houses for the people. Commendable steps but there are far more pressing issues that need urgent attention. The delay has already cost the country dearly and it time to act now.

After having been placed on the Grey List of the Financial Action Task Force (FATF), a team from the Asia Pacific Group (APG) visited to assess the progress made by Pakistan. Apparently the team has not been impressed with the progress and Pakistan has been asked to do more to get its affairs in order. The group found the legal framework to be lacking and the institutional arrangements weak. In particular they cited that the set-up for scrutinising the activities of non-profit organisations, brokerage houses, exchange companies and donations of corporate entities not robust. Where the framework appeared appropriate the mechanism for implementation was unable to track the financial flows due to lack of coordination amongst the different agencies. Given the implications of being on the FATF Grey List it is imperative that the government devises the appropriate strategy to be in compliance with the regulatory framework at the earliest to reduce the cost of doing business.

Even after receiving the bailout from the IMF the government would continue to face major challenges, which can only be resolved through major structural reforms. There will be a definite slowdown in economic activity and with the rise in prices of basic utilities and the devaluation of the Pak Rupee the cost of living and conducting business would be significantly higher. This would also contribute to further unemployment in the country, which could give rise to socio-economic problems and security issues.

It is imperative to arrest the decline in the Industrial sector. The industrial base needs to be revitalized and the focus needs to be firmly on an export-led growth strategy by rationalizing duties for imported raw material for export purposes. With the recently announced austerity measures, monetary tightening and higher inflation there is a crisis of confidence of sorts which would prove to be a challenge when attracting investment for economic growth.

While the government could be constrained in spending under the coevenants of the IMF, the private sector would need assurances of security and returns to be involved in the economic development. The current economic downturn, reflected in declining trends in the capital, currency, commodity, retail and real estate markets, reflect a far deeper malaise in the economy. By portraying indecisiveness in decision making and a legacy of U-turns the PTI government has been unable to infuse the required level of confidence so far.

It is essential that the government focuses on boosting the agriculture sector; expands the tax base; increases the exports; and adopts an effective import-substitution industrial base.

The witch hunt has to stop as it acts to deter investor confidence. Irresponsible acts such as the name and shame game without a trial would lead to a flight of capital. Given the past experience of the government it is highly recommended that the government stay away from involvement in the housing construction business to avoid financial scandals. On a macro level the government needs to devise policies for control of the burgeoning population, and implement policies for effective and skill based education to improve the level of manpower available in the country. This is essential for improving the competitiveness of the country.

Pakistan has potential that needs to be utilized. Successive governments have adopted an extractive policy framework, it is now time to have one that is contributory. Criticizing the past will not achieve anything, we need to move forward and the PTI government has a great opportunity to build Pakistan if they keep their heads firmly on their shoulders and adopt a conciliatory and encouraging attitude. 

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