Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
The coalition government of Pakistan Democratic Movement (PDM), led by Pakistan Muslim League Nawaz (PMLN), assumed power as a result of no-confidence resolution against premier Imran Khan on April 9, 2022. At that juncture of history, Pakistan was facing acute macroeconomic challenges, chief among which was averting the risk of financial default. Since then the country is fast heading towards the same owing to the flawed policies of Pakistan Tehreek-i-Insaf (PTI) and inactions on the part of PDM government in the first two months.
After securing power, PDM government started desperate efforts for financial support from global lenders and Middle Eastern countries as well as China. However, the visits of a high-level delegation to the United Arab Emirates and Saudi Arabia failed to yield any financial support till today. Unfortunately, mismanagement of resources, poor economic decision-making and breach of some agreed terms with the International Monetary Fund (IMF) by the previous government have made Pakistan economically vulnerable. Despite many unpopular decisions, the new government has so far failed to restore the already shattered faith of international community in Pakistan.
The confidence-building measures for reinstating the stalled Extended Funded Facility (EFF) programme by the IMF necessitated tough economic decisions. Steps taken by the economic managers have adversely impacted businesses, masses—in fact, all stakeholders. The previous PTI government under the July 2019 EFF programme agreed to introduce reforms for fiscal consolidation, reduce public debt and depoliticize gas and power tariffs. The aim was to gradually bring different sectors to cost recovery levels, including implementation of adequate pricing structure by introducing comprehensive reform measures to curtail burgeoning circular debt. However, the previous government could not deliver desirable results. The PTI government also failed to implement the agenda of fiscal reforms resulting in record accumulation of circular debt of Rs. 2400 billion. The PTI government also created circular debt of Rs. 1500 billion in the gas sector leaving behind a record fiscal deficit of over 9% of the GDP for fiscal year 2021-22,
PTI government’s focus in four years remained on increasing fuel and electricity prices and the imposition of oppressive taxes to meet fiscal deficit. Since assuming control, the incumbent government had been trying to overcome financial mess through an orthodox approach. The initiative risking political capital included reversal of unfunded subsidy on petroleum products and implementation of revised electricity cost structure. Just within few days, petroleum products were raised by more than Rs. 100 per liter and the currency suffered heavy losses after free floating crossing the psychological mark of Rs. 220 and now not even available at Rs. 225. The inflation numbers have skyrocketed to 21.3% in June 2022 and are expected to remain in double digits for many months to come.
The political cost of “tough decisions” was on the cards—it took no time to translate into an electoral defeat, especially for PMLN. The recent by-elections of July 17, 2022 in the Punjab—a province of 120 million people—were a clear manifestation of the anger and wrath of overwhelming majority of people as they face unbearable economic miseries due to inflationary pressure and price maneuvering by cartels.
Punjab has always been considered a stronghold of PMLN, but it only managed to secure just 4 seats out of 20. For PMLN, it is high time for introspection as it has failed to rectify the economic meltdown left by the PTI government. Further delay in taking corrective measures may lead to bankruptcy at the international level. Both the actions and the narrative remained unconvincing, and the PTI took full advantage of it. The social media team of PTI worked tirelessly to divert the attention from economic issues and successfully exploited patriotic mantra.
Prime Minister Shehbaz Sharif was supposed to take a lead and inform the public about the grave economic situation and its impact on day-to-day life of the common people. He should have convinced the masses about the repercussions of any delay in taking corrective measures. However, he is apparently unclear about facts and figures. Initially, he delayed his speech to the nation to highlight challenges faced by the economy and then in his first speech he missed to narrate the facts responsible for causing harm to national exchequer.
The PMLN and its collation partners have been blaming PTI leaders of corruption maligning them in different alleged scandals like sugar, wheat crisis, medicine, ring road, Tosha Khana, using a lady as a front woman for taking bribe in transfer postings of government officials, blackmailing officials of National Accountability Bureau etc. However, since April 2022, the government and relevant agencies have not registered a single corruption case against the PTI’s Chairman or his party leaders. Simultaneously the PDM government has failed to introduce any policy reforms till today. It appears they are clueless about running the state’s affairs. They are just following in the footsteps of their predecessors to meet fiscal gaps by resorting to increasing fuel and electricity prices, imposing petroleum levy, or imposing additional taxes on existing taxpayers for revenue mobilisation. On the other hand, wasteful and unproductive expenditures have not been curtailed at all.
The recent meltdown of the exchange rate will further increase cost of production. It will add to already fast deteriorating economic conditions. The staff level agreement with the IMF mentions that the market-determined exchange is to be followed. However, it does permit limited interventions to avoid disorderly market conditions (DMCs). Unfortunately, owing to low level of reserves, the space available for intervention is limited and the Pak rupee has succumbed to the manipulation of the market. In this regard, the administrative role of the State Bank of Pakistan (SBP) is critical. For the last few months, SBP is operating without a Governor—it reflects utter confusion on the government’s part. At this critical juncture, such casual behavior is simply disastrous as Board of SBP is feared to become dysfunctional very soon for delaying requisite appointments.
The economic indicators have already turned red and immediate intervention by the government is required. The policy of leaving things on market forces in a speculative environment with political uncertainty has already landed the country in troubled waters. The Prime Minister must take the lead and engage all stakeholders and experts for devising a pragmatic revival plan. He must also inform the public at large about the roadmap to overcome this dangerous economic situation. This alone can help in the revival of confidence of investors and in arresting further deterioration caused by the political turmoil and economic uncertainty prevailing in the country.
Huzaima Bukhari & Dr. Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions