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Economic realities will derail all lofty slogans
WHEN inflation-hit and poverty-stricken voters head to polling stations on February 8, after nearly a month of hearing lofty campaign promises designed by parties vying to come to power, they may be forgiven in hoping for better days.
The reality, however, is that they would be sorely disappointed. The plate of economic and fiscal challenges is full and the caretakers have been able to clear only a tiny part of the backlog.
It certainly won’t be a bed of roses for any political party or coalition to rule the country – economically battered and politically bruised by adventures and missteps of the past decade.
In fact, healing these deep economic and social wounds may be a long and arduous process, provided the incoming administration works towards that goal, and voters themselves are willing to absorb more shocks for the sake of better things to come.
Another round of gas and electricity rate hikes would already be in place before the next PM takes over
With the rate of inflation growing at 30 per cent, the number of those living below the poverty line increases with each passing day. As of now, more than one-third (38.2pc to be precise) of the 242 million people in the country are estimated to be below this benchmark, what with the ever-increasing rates of electricity, gas and other essentials.
As a reference, this level of poverty is the highest in South Asia — with the exception of war-torn Afghanistan — and much higher than then regional average, which is just below 30pc.
Living in the same neighbourhood as the economic powerhouses of China and India, the 3pc average economic growth rate looks paltry.
No ‘freebies’
For far too long, structural weaknesses have been put on the backburner, leading the country to a virtual precipice. Yet, the statements coming from the political leadership – promising lower bills, cheaper groceries and better days – appear to be growing more and more irresponsible and antithetical to the situation beyond polling day, to say the least.
The time for freebies at public expense is long gone, thanks to the continuous mishandling of economic issues, but leading parties continue promising free electricity and gas when the state of the national economy calls for the exact opposite.
As a token of fiscal responsibility, the new government may have to announce a bar on the allocation of hundreds of billions of rupees annually for schemes on legislators’ quota that practically have little-to-no development impact on ground, save for lining the pockets of officials, contractors and politicians.
At the same time, it must chalk out urgent plans for restructuring and privatisation of loss-making entities. The long-advocated theory of protecting the ‘family silver’ has already brought the ‘family’ to the brink of disaster.
Even beginning the process of making such plans would send a positive message to friends and lenders, i.e. that the government is not only showing fiscal restraint, but also appears committed to implementing challenging reforms.
Otherwise, heightened risks to public finance would keep our sources of financing high and dry, especially at a time when the country’s borrowed foreign exchange reserves are insufficient to finance more than six weeks of imports.
IMF straitjacket
Soon after its swearing-in, the new government will need to finalise another bailout package with the International Monetary Fund (IMF), entailing ‘deeper and broader reforms’.
Among other things, the full cost recovery of our energy supply is to be a key theme, i.e. the clearance of circular debt – around Rs3 trillion each in the gas and electricity sectors – mainly through price adjustments and some injections of taxpayer money.
These will smoothen things over, not only with the IMF, but also other multilaterals and bilaterals, particularly the World Bank, Asian Development Bank, Saudi Arabia, UAE and China.
The new regime’s diplomatic and economic policy capabilities will also be tested almost immediately, as the new administration performs a balancing act between the IMF for multilateral support and relationships at the personal and state-level with the Chinese leadership, which now stands as Pakistan’s biggest creditor.
While the IMF-led lenders had been insisting on renegotiation of electricity contracts with China, as Pakistan did with other local and international investors, at least three previous requests for an extension in the debt repayment period for Chinese power producers had been given the cold shoulder.
The size of social protection funds may expand, but this safety net will only offer piecemeal support for those already living below the poverty line
Then, as reinforced by the IMF last week, another round of gas and electricity rate hikes would already be in place before the next prime minister and their cabinet take over. Rather than being able to announce any fresh relief measures, the new leadership would find their hands tied into a medium-term (at least three year) fiscal and monetary discipline regime enforced by the lender of last resort.
Under the IMF umbrella, lenders jointly want to push to accelerate energy reforms – both electricity and gas, particularly to reduce costs and losses stemming from distribution and transmission, measures to cut red tape and ease the business environment and effective steps for reducing losses of the state-owned enterprise, particularly via privatisation and concessions to the private sector.
The size of social protection funds may expand, but it would be unable to stop more vulnerable people falling into the poverty trap. This safety net will only offer piecemeal support for those already living below the poverty line.
The need for climate resilience
Pakistan is already on its way to ‘energy poverty’, given the rise in cost and resultant decline in usage that is currently being witnessed. At less than 20 MMBtu, the country has already become one of the lowest per capita energy consumers in the world, despite being among the six largest nations in terms of population.
Compounding matters, climate change has now emerged as a real challenge for the economy, as cycles of flood and drought have intensified, as has the fatigue of international donors.
The country’s poor macroeconomic indicators, particularly the high debt-to-GDP-ratio, questions around debt sustainability and the resultant low credit rating mean insufficient and unbearable conventional financing, as is evident from the non-realisation of about $6bn from the international market through commercial banks and international bonds targeted for the current fiscal year. While friendly countries keep on rolling over bilateral debt and term deposits, such a practice has political and reputational costs for any respectable state.
The IMF has already warned that any external financing shortfalls will only increase the government’s reliance on expensive financing from domestic banks, which could further crowd out private credit, while higher commodity prices and tighter global financial conditions could put pressure on the exchange rate and external stability.
In such an environment, the new government would have to quickly prepare the country’s systems for alternate and cheaper financing sources, particularly those available through climate financing windows and green bonds.
For this, Pakistan will be required to design its coming budgets and all future investments — including those coming through the newly formed Special Investment Facilitation Council (SIFC) — to be completely climate-resilient. The public sector development programme (PSDP), public-private partnership (PPP), and the SIFC would need to be reoriented for climate finance, innovative instruments, carbon credits, and accreditation with global fora.
As per World Bank’s 2023 report, Pakistan requires $348bn to achieve systemic resilience between 2023 and 2030 to climate-proof its development trajectory.
Expanding the revenue base
The reform menu set by the World Bank also includes “expanding the tax base by increased taxation of assets, property, and sectors traditionally out of the tax net, particularly agriculture, small retail, and real estate, further reduction in tax exemptions and effective implementation of the treasury single account to reduce government borrowing needs”.
The caretaker government has only recently reiterated, on the basis of commitments made by the PDM government as part of its ongoing standby arrangement with IMF, it will also continue with structural fiscal reforms, especially improvements in revenue administration to build its capacity to expand the tax net and share the tax burden more widely.
In addition, the caretakers are launching a door-to-door campaign in the four provincial capitals and Islamabad to register non-filing retailers and streamline their tax filing.
The government has even undertaken to detect evasion by “cross-referencing tax filings with electricity meter data” and implement other safeguards to protect the potential revenue raised from these actions.
The incumbent caretaker and the previous PDM regime have also committed to drastic measures on the expenditure and revenue side. For example, the centre has to abolish at least 17 federal ministries it had been retaining for bureaucratic reasons, although their responsibilities had been devolved to the provinces many years ago. It also has given undertaking to stop funding provincial development projects.
On the revenue front, the priority is expanding the tax base for a higher tax-to-GDP ratio through better taxation of already under-taxed sectors, such as like retail, property and construction, development and digital markets etc.
But all of this is easier said than done. It will require political stability in the medium- to long-term, and a steadfast implementation of challenging tasks to put the country back on course towards higher growth.
Although things are not looking particularly rosy, even after February 8, at least elections will end the longer-than-normal period of political instability that has all but crippled the country in economic terms.
Published in Dawn, January 30th, 2024
Header image: Commuters move past the election banners and posters of the PPP hung over a street in Karachi, on Monday. — AFP
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