Shehbaz ‘speed’ struggling?

The newly-formed government did not swallow the bitter pill of increasing petroleum prices. The political pressure generated by power shows by PTI (Pakistan Tehreek-e-Insaf) has made the coalition government defensive. This is not the first time such populist, yet disastrous decisions on economy have taken place, and perhaps won’t be the last one, unless the energy and food sectors are deregulated and the pricing power is taken out of the hands of government.

That is why this writer like the IMF(International Monetary Fund) is a proponent of deregulation and independence of economic institutions –such as SBP (State Bank of Pakistan), SECP (Securities and Exchange Commission of Pakistan), CCP (Competition Commission of Pakistan), OGRA (Oil and Gas Regulatory Authority) and NEPRA (National Electric Power Regulatory Authority), to name a few.

All past four governments left office with the economy facing full-blown crises. The obvious metric of a crisis on external front is coverage of imports for ‘n’ of weeks by SBP’s foreign exchange reserves. SBP forex reserves stood at 12 weeks in 2008 at the time of Musharraf’s departure, 7 weeks in June 2013 when PPP’s term ended, 8 weeks when PML-N government left office in June 18, and 7 weeks upon the ouster of PTI government in April 2022. Generally, below 12 weeks (3 months) of cover constitutes an alarming situation.

The situation was not much different when Musharraf took over in 1999 or during the musical chair game of the 1990s (when four successive governments could not complete their respective terms). Political turmoil at the time weakened economic institutions to the extent that it has become the root-cause of economic crises thereafter in the 21st century.

Powers that be need to realize that interference in the performance of civilian government has economic repercussions. In the 1990s, institutions were weakened because governments were constantly battling for survival against opposition and establishment that would often unite to oust them. Then Musharraf refused to pass the impact of increasing petroleum prices on to consumers due to severe political pressure during 2007.

Then beginning with the 2014 sit-in all the way to the Dawn Leaks and the Panama Papers in 2017, the Nawaz government remained under fire throughout its tenure, so kept currency artificially overvalued to retain popularity. In this context, how the PTI government acted during its last 2.5 months in power is history repeating itself.

Almost all governments during the past thirty years faced populist agitations throughout their respective tenures, forcing them to make populist decisions for short-term gains. Successive governments were cornered, and left behind land mines for the opponents that followed. In the process, the path to sustainable economic growth has been sacrificed, time and again.

Whoever the architects of such populist agitation, it is only natural that embattled governments would act in self-interest and to safeguard their (personal, party, or institutional) interests. Back in 2016-18, PML-N (Pakistan Muslim League-Nawaz) proposed a ‘charter of economy’ to take economic decisions out of the political domain; but the attempts were ridiculed by PTI which was growing in popularity at the time.

Almost every party has privatization of state-owned institutions on its manifesto; but whenever any government put forward plans to make that happen, political opponents staged strong backlash to gain popularity. Projects initiated by the outgoing governments are usually dumped by the next costing not only huge sum of money but also eroding investor confidence.

Today, the country is on the verge of economic collapse. SBP reserves can cover a mere 7 weeks of imports. To avert a situation such as the one being faced by Sri Lanka (where the country ran out of reserves) Pakistan build up its foreign exchange reserves.

With reserves falling below 12 weeks of imports, bilateral, commercial, and multilateral lenders are reluctant to lend as the risk to default increases. They usually look for IMF’s approval. The IMF gauges the sustainability of fiscal, monetary, and external macroeconomic policies. Right now, the ongoing IMF programme is in limbo. The primary reason is that the outgoing PTI government reduced and froze electricity and petroleum prices even though it had made a commitment to the IMF that it would increase these prices.

The right step for the new coalition government is to increase the prices as recommended by OGRA and NEPRA. But the PM decided against OGRA’s recommendations. This is done even though PML-N economic team is crystal clear that without IMF support the country will fall into an abyss. The problem is the government is a coalition government and power shows put up by IK. PM Shehbaz Sharif has started off on a weak footing, which is not a good omen. Let’s hope in this week with formation of cabinet, government would be able to raise petroleum prices and start negotiating with the IMF. The chances are that 7th and 8th reviews will be clubbed and for that the government must come up with a tough and non-populist, serious budget.

The situation on ground contrasts with what PML-N voters are expecting. They are hoping for a return to the Dar (the then finance minister Ishaq Dar) days and hoping that Pakistan will run on Shahbaz ‘speed’ of 2008-18 period. However, as Shahbaz Sharif is now finding out, running Pakistan is very different from Punjab. Shehbaz Sharif while being chief minister had a healthy majority in Punjab. The provincial government used to get its share of federal revenues and he managed good governance, which ensured his continued popularity. At center, there are too many complications and compulsions – both economic and political; it’s not an easy path.

The only way to attain stability is to boost foreign exchange reserves. IMF’s nod is required before returning to sustainable growth. But to have pro-election policies, more is needed without (or less) strings attached. China’s rollover of $2.4 billion is almost done. That is not enough. The buzz is that Nawaz and Dar shall return from London via the Middle East along with some good news and big chunk of support from friendly countries – such as the $1.5 billion gift (with no economic conditions) they secured back in 2014. A bigger amount is warranted in 2022. Then the PML-N supporter would expect Dar’s magic to work. However, just like Imran’s charisma wasn’t enough, Dar’s magic will not take the economy to a sustainable path.

Without help from friendly countries, it is not advisable for a weak coalition to stay till the end of term in mid-2023, as economic tough decisions would hurt their popularity and PTI will cash in on their failure. In such a case elections should be called earlier.