With the mainstream political parties vying for power at any cost, Political intolerance and uncertainty continue to plague Pakistan’s already tumultuous economic landscape. According to experts, many countries are facing multidecade high inflation and economic meltdown amidst global poly-crisis (covid, climate change, and conflict). However, Pakistan is one of the rare examples where political uncertainty has fuelled the current economic meltdown. It can be argued that implementing the current IMF program, a must for Pakistan’s short-term macroeconomic stability, is the first victim of ongoing political turmoil.
Resorting to popular measures in contravention of what we had committed to the IMF and a “one-step forward, two steps back” attitude to complete the IMF program have had a heavy toll both on our global creditworthiness and the value of the rupee against the dollar. Taking the delayed difficult economic decisions in one go led to multidecade high depreciation of the value of the rupee against the dollar, which aggravated the impact of multidecade high inflation by eroding the purchasing power of the consumers.
To counter depleting foreign exchange reserves, the government is restricting the opening of “letters of credit” (LCs) for imports, adversely affecting the supplies and business activities. This is leading to unemployment at a time when the country has entered stagflation (very high inflation, very low economic growth).
Despite, taking most of the bitter pills, the government is still not able to get the staff-level agreement (SLA) signed with the IMF for the ninth review of the program (a must to get the next tranche of loan approved by the IMF board, and to get a “letter of comfort” which would enable us to access other multilateral funding). The reason is political uncertainty. Wonder why? Let me explain!
Pakistan has committed to the IMF to maintain foreign exchange reserves that require rollovers and financial assurances from its bilateral creditors, especially China, Saudi Arabia, and the UAE. These friendly states have no preference for any political party in Pakistan and have always maintained good relations with every government in Pakistan. However, since February 2022, they have been in a wait-and-see mode, awaiting the result of the ongoing political tug-of-war.
They are finally rolling over their commercial deposits on the assurance and guarantee from non-political quarters. However, the four months delay in concluding the ninth review (which was to be concluded in December 2022) means that Pakistan needs to mobilize additional foreign exchange reserves from friendly countries.
The forex reserve targets for June 2023 are considerably higher than those of December 2022. An unnecessary delay in concluding the SLA due to ongoing political uncertainty means that the amount Pakistan needs to borrow from Saudi Arabia, China, and UAE to conclude the IMF deal has significantly increased.
Even successfully concluding the current IMF review will not completely remove Pakistan from economic thick. It has not defaulted on any of its sovereign debts, and the next payment of the commercial bond is not due before April 2024, so technically speaking, it has averted a default on sovereign debts. However, debt servicing on its bilateral debts is a regular feature. It has to make debt repayments to its bilateral creditors and then get the same amount rolled over. Walking on this tightrope depends on Pakistan’s foreign policy choices, whose consistency can only be assured through political stability.
Beyond 2023, depending upon its current account deficit, it will have to arrange 25 to 35 billion dollars of external assistance each year for the next four years. It needs to repay a whopping USD 77.5 billion in external debt from April 2023 to June 2026. This includes repayments to Chinese financial institutions, private creditors, and Saudi Arabia.
In this situation, to avert a default, Pakistan requires a new bailout package from the IMF. It may be an extension of the current one. However, the IMF cannot negotiate a new deal until the political turmoil stabilizes. This delay will worsen Pakistan’s economic situation. Moreover, the IMF will demand policy and structural reforms as preconditions for any next bailout, preferably getting reflected in the next federal budget.
These reforms are likely unpopular, and no government would want to present them in a budget before the general elections. This would further postpone the negotiations with the IMF and increase Pakistan’s economic vulnerabilities.
Obviously, there would be no honeymoon period for the next government. Without any cushion to delay securing the next IMF bailout, all political parties, aspiring to form the federal government after the next elections would have to take their voters into confidence about the non-popular economic decisions they would have to make after coming into power.
Formal negotiations between the PDM government and PTI to address the deadlock on constitutional interpretation for holding the provincial and next general elections is a positive development. Besides settling the timeframe and rules of the game for these elections, our political leadership must also discuss the possible way forward for coming out of the current economic mess.
They have tried to address Pakistan’s economic issues while in power and have opposed the same corrective measures when in opposition. The lose-lose approach will hurt them in the future and the people of Pakistan consistently.
I have proposed it earlier and will repeat again that like the National Security Council, a statutory body to ensure economic security – comprising the prime minister, the leaders of the House in the Senate, Leaders of Opposition in the Senate and national assembly, ministers looking after economic and energy ministries, chief ministers of all provinces, and representatives of the defence forces leadership– should be constituted (or the existing membership of National Security Council be amended to discuss economic agenda).
The council should deliberate upon economic challenges and take collective ownership of the much-needed short-term, medium-term, and long-term policy and structural reforms – with or without an IMF programme. Besides debt sustainability and containing energy circular debt, it should also forge a consensus on possible relief measures to insulate the people of Pakistan from the effects of such reforms and suggest measures to strengthen the existing social safety nets.
Such a forum or any other forum representative of all stakeholders would provide much-needed certainty to Pakistan’s development partners, friendly states, and people amidst the ongoing political uncertainty, which, in turn, has led to economic uncertainties. It is time to think beyond partisan interests.
