Huzaima Bukhari, Dr. Ikramul Haq & Abdul Rauf Shakoori
About 84 % of countries are expected to have lower headline (consumer price index) inflation in 2023 than in 2022. Global inflation is set to fall from 8.8 % in 2022 (annual average) to 6.6 % in 2023 and 4.3 % in 2024––above pre-pandemic (2017–19) levels of about 3.5 %. The projected disinflation partly reflects declining international fuel and nonfuel commodity prices due to weaker global demand. It also reflects the cooling effects of monetary policy tightening on underlying (core) inflation, which globally is expected to decline from 6.9 % in the fourth quarter of 2022 (year over year) to 4.5 % by the fourth quarter of 2023. Still, disinflation will take time: by 2024, projected annual average headline and core inflation will, respectively, still be above pre-pandemic levels in 82 % and 86 % of economies—World Economic Outlook Update:Inflation Peaking Amid Low Growth,IMF, January 2023
The extract from IMF’s recent publication corroborates the fact that Pakistan’s economic framework is not aligned with global trends. Its fundamentals, despite visible signs of recovery for an overwhelming part of the global economy, are incapable to reap benefits. Pakistan remains exposed to a multidimensional crisis—political instability, stagflation and security challenges. The legacy of the recent crisis is now almost a year and a half old when the previous government failed to take timely decisions to mitigate potential economic risks. The senior leadership of coalition partners of Pakistan Democratic Movement (PDM), at the time of inheriting crippling economic framework, rather taking it over with fervent choice, made tall claims of having the most accurate diagnostics of the situation as well as the ability to steer Pakistan out of it. However, contrary to their claims and promises, the economy, already facing various challenges since the start of 2022, started to deteriorate at alarming pace, posing serious threats at external front and for national security.
With no-confidence move on table, finally leading to unceremonial exit—though legal—the coalition government of Pakistan Tehreek-i-Insaf (PTI) opted for political tactics to portray a rosy picture. It deliberately avoided passing the burden of increasing fuel and energy prices to consumers. The tug of war between PTI and its opponents ultimately resulted in regime change in April 2022. At that crucial juncture, political instability reached its highest, pushing economic deterioration at the lowest ebb. It strained relations with the lender of last resort, International Monetary Fund (IMF). The IMF programme, stalled since the start of 2022 due to imprudent approach and self-serving political interests, needed immediate restoration, notwithstanding severe internal challenges, global inflation and record increase in commodity prices.
The PDM government failed to take timely decision of approaching IMF under the false hope of receiving help from friendly countries, and thus avoiding political cost, associated with strict curative measures. Subsequently, realizing the magnitude of formidable economic situation and failure to obtain “friendly help”, the PDM government passed on the unbearable burden on masses by removing subsidies on fuel and energy, resorting to free-floating currency, and upward revision of fuel prices, opening floodgates of inflation. These “confidence-building measures” finally paved the way for resumption of IMF programme at the end of August 2022. The Executive Board of IMF completed the combined Seventh and Eight Reviews under the Extended Fund Facility (EFF). It resulted in release of tranche of US$ 1.1 billion. Further, the Board approved extension of EFF until June 2023, increasing total outlay to US$ 6.5 billion.
Intimation by two provincial governments, led by PTI, to the federal Finance Minister of inability to ensure the budgeted provincial surplus, though was potentially harmful for negotiations, yet the then finance minister of PDM, Miftah Ismail, succeeded in convincing the IMF for resumption and extension of its programme. It happened even after the finance minister of Khyber Pakhtunkhwa allegedly copied his letter to the IMF’s negotiating team on the day the disbursement review was in progress.
The successful resumption of IMF programme came with a long “to-do list” with strict timelines. The government hardly made any significant efforts to meet the same. Immediately after the resumption, Miftah Ismail stepped down under pressure from his own party, all ruling coalition partners also consented to Muhammad Ishaq Dar taking over Ministry of Finance. It is a known fact that Ishaq Dar has always been the preferred choice of Pakistan Muslim League (Nawaz) whenever it is in power. Even before taking charge as finance minister, Ishaq Dar made hyperbolic claims of bringing down the dollar below Rs. 200, reducing fuel prices and cooling down inflation. However, since first quarter of the current fiscal year, inflation has been constantly over 20% and likely to cross 30% after massive devaluation of Pak rupees.
With frequent revisions in the policy rate by the State Bank of Pakistan (SBP), now at historic high of 17%, the government could not bring inflation down, now feared to be as high as 35% in coming months. The dollar kept on creating new records against Pak rupee and on January 31, 2023, it reached the all-time record high of Rs. 270—presently it is hovering between Rs. 268-270, and not available at this peak level in open market.
All measures taken by Ishaq Dar have been falling short of his claims and proving against the prudent principles of economic management. One principal reason is administrative failures and his inability to take timely decisions and meaningful interaction/discussion with stakeholders. He tried to contain the dollar between Rs. 225–Rs. 230, which backfired. Resultantly, the policy of administrative control of maintaining an artificial lower level of dollar in interbank market paved the way for an informal market where dollar has been trading above Rs. 270.
Clearly, Pakistan remained in constant non-compliance mode vis-à-vis commitments with IMF to maintain a “market-based exchange rate” and other “things-to-do” agenda. Succumbing at last to the pressure, though in a desultory way, the SBP set the dollar afloat, which within 2 to 3 trading sessions lost 17% of its value to touch near the open market level, generally known as a “grey market rate”. Thus, either the government was unable to comprehend the market dynamics accurately or administratively succumbed to speculators, or perhaps both presumptions are correct!
Like finally succumbing to market-based rupee-dollar parity, the government on January 29, 2023 raised petroleum products’ prices by more than Rs. 35 in a single day before the stipulated timeline. In order to avoid public backlash, the government was trying to defer this increase but in anticipation of IMF’s Ninth Review it was compelled to raise prices. Delay in the Ninth Review, due in November 2022, has been adversely affecting market perception, and also contributed towards fast-depletion of forex reserves, though Pakistan has been successfully paying off its external obligations. In the process, our foreign exchange reserves fell to an extreme low. Yet again, the government has taken corrective, rather forced measures, in haste. It also wasted precious time due to its weak decision-making power.
The abnormally high prices of commodities, many claim we already have hyperinflation, are negatively affecting the business community and working class. Their ability to sustain any further pressure has almost diminished. The responsibility lies with the incumbent Prime Minister and his historic large cabinet, who despite being aware of this precarious economic situation, failed to take correct decisions and curative measures on time. There is now a consensus that it is time to undertake much-delayed, long-overdue fundamental structural reforms or perish.
Huzaima Bukhari & Dr. Ikram Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at the Lahore University of Management Sciences (LUMS), members of the Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’. They have recently co-authored a book, Pakistan Tackling FATF: Challenges and Solutions