Spearhead Analysis – 27.07.2018
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
Imran Khan’s post-election speech was a far cry from the usual fare doled out after elections in the past – it was sincere, balanced, conciliatory and progressive. After a long time one heard a Leader speak in Pakistan. These elections weeded out a lot of the political bigwigs who for decades have lorded over the people of Pakistan, without making much difference in their lives. If anything the hardships have continued to increase and the institutions have been weakened. Imran Khan touched all the right chords when he talked of improving Education, Healthcare, Economy, and Competitiveness; and most of all he talked of Foreign Relations, Austerity and impartial Accountability without personal vendettas. A commendable speech, spoken from the heart like a true leader. Perhaps, we are finally on the right path.
One of the foremost tasks facing the new government focuses on economic revival and the socio-economic development of Pakistan. It is a mammoth endeavor to say the least, but not one that is insurmountable. The Pakistan Tehreek-e-Insaf (PTI) in its five-year economic plan has set out some hard benchmarks with the task of creating 10 Million jobs, constructing 5 million low-cost houses, increase in subsidy for the farmers and increase in the overall revenue collection by the Government. Successive governments in the past have made similar promises, but somewhere along the line lost the plot and failed to deliver. There are many such instances of failed promises that one can point out in the last 5-year tenure of the PML-N Government as well as the PPPP government before them. People have high hopes from Imran Khan and so far he appears to have his feet planted firmly on the ground. He needs to put together a competent team and take some tough decisions in the short-run, to clean up the rot – this will require concerted efforts and an iron will.
The Architect of the potential economic revival of Pakistan is likely to be Asad Umar. He has stated that all options are on the table to steer Pakistan out of the economic morass, and the International Monetary Fund (IMF) could be a key component within that context. Pakistan has already booked a Current Account deficit of US$18 Billion in FY18 and it is being projected that a similar deficit would face the country in FY19.
The IMF, Ministry of Finance, and several independent economists have estimated that Pakistan’s gross external financing needs for FY2018-19 would be in the range of US$23 Billion to US$28 Billion. Even after accounting for projected foreign direct investment (FDI), net expected loans from multilateral and bilateral sources, anticipated issuance of sovereign bonds and commercial borrowings, it is estimated that there would be a gap of around US$11 Billion. This gap could be considerably higher as it is based on several plausible assumptions. The fiscal gap is higher than the Foreign Exchange reserves of Pakistan, which currently stand at around US$9 Billion and are being rapidly depleted. Since, January 2018 alone the reserves are down by 30 per cent.
In the last 3-year EFF programme from the IMF the government managed to arrange US$6.2 Billion. It will be a Herculean task to arrange US$11 Billion in FY19 and one that will require many ‘unpleasant’ decisions to be made. Decisions such as the privatisation of state-owned enterprises, such as PIA and PSML, which in the past has had a major political fallout. On top of this the relationship with USA could potentially play a significant role in terms of access to funding.
Pakistan has a 2 Billion Special Drawing Rights (SDR) quota with the IMF, roughly equal to US$2.8 Billion. In 2008, the IMF had approved a US$11.3 billion bailout package for Pakistan, equal to 700 per cent of the country’s quota. In 2013, the IMF had approved a US$6.2 Billion bailout package, equal to 425 per cent of the allocated quota. In 2018, Pakistan could be seeking financing in the range of the 2008 arrangement with the IMF. It is a sad reflection of the dismal economic management over the past 10 years.
Pakistan has devalued its currency by almost 24 per cent since the end of last year, and it has recently tested the levels of Rs.130 against the USD in the open market. The key policy rate has been hiked to 7.5 per cent. Inflationary pressures are starting to creep up and given the fiscal gaps the growth rate could fall below 5 per cent in the current fiscal year. If Pakistan does manage to secure IMF assistance, other multilateral agencies may restore their currently suspended budgetary support to Pakistan, which could help ease the immediate fiscal pressure.
The incoming government needs to focus on myriad factors. They need to enforce austerity measures within the government. As a starting point: Why do state functionaries need to import expensive vehicles, when they could easily be transported in the vehicles being manufactured in the country? They need to improve regional trade linkages and enhance competiveness to boost exports. The institutions need to be strengthened to operate within their sphere of responsibility. Merit needs to be enforced and competence and professionalism appreciated. There is a dire need to improve internal revenue generation and reduce the reliance on incessant borrowing. Most of all they need to attract investment by enhancing the international reputation and image of Pakistan and providing an environment conducive for such investment. For now, the economy takes precedence over the other issues and once the new economic ‘mechanics’ have managed to overhaul the engine of economic growth the other factors will start to fall in place. There are high hopes from Imran Khan and his team and they have a great opportunity to deliver.