Pakistan’s piecemeal economic management

Amid some uncertainty about a bailout from the International Monetary Fund (IMF), the government hopes the Fund’s executive board will meet in September to approve a $7 billion loan package for Pakistan. Finance Minister Mohammed Aurangzeb had earlier expected this to take place in August. The delay is attributable to the need for the government to first secure around $2 billion in additional financing and confirm $12 billion of debt rollovers from China, Saudi Arabia and UAE. 

The government is confident that the larger, longer duration Fund program will be approved as all other conditions have been met. Once this happens it will of course help to stabilize the economy, that has been in the critical ward, and restore some confidence. But while the bailout is necessary to meet the country’s immediate financing requirements, it is not sufficient to drive a sustained economic recovery. External support is a fire fighting response that cannot fix the economy’s structural weaknesses. IMF programs help to create the conditions for economic recovery. But policies to grow the economy, promote investment and build business confidence are for the country to evolve, own and implement through structural reforms.

This requires an economic vision and a comprehensive plan. So far, a visionless government’s economic strategy has involved little more than meeting IMF conditionalities, trying to secure debt rescheduling from bilateral donors and seeking high-cost commercial loans from Middle Eastern banks. The government has now also approached Saudi Arabia for an additional loan. Prime Minister Shahbaz Sharif keeps talking about rolling out an economic plan but five months into his government none has emerged. He has appointed a plethora of committees and task forces on a range of economic and trade issues as if economic management can be done by committee. This, when the solutions are already out there, long known, never implemented. One such committee was tasked by Mr.Sharif with evolving a home-grown economic plan, ironically under the stewardship of a foreign consultant. But when the plan it produced left the prime minister unimpressed the task of reviewing it was handed over to yet another committee headed by Deputy Prime Minister and foreign minister Ishaq Dar, whose handling of the economy in previous PML-N tenures proved ineffective and controversial. 

Significant foreign investment will be elusive unless macroeconomic stability is established and internal political tensions ended. 

- Maleeha Lodhi

A credible economic plan has to address the country’s weak macroeconomic fundamentals, which persist and make any recovery fragile and unsustainable. The experience so far has been of taking band-aid measures that have left the problems of external and internal financial imbalances unresolved. Unless structural issues are addressed the country will not escape from the vicious circle of anaemic growth, high deficits, heavy borrowing, growing indebtedness and soaring inflation. The last two years have seen historic levels of high inflation and low growth accompanied by record borrowing at home and abroad. Investment has plunged to its lowest level in half a century.

The underlying problems of the economy are well known – chronic fiscal deficits, a narrow and inequitable tax regime, limited export base, financially haemorrhaging state-owned enterprises, an inefficient energy sector’s circular debt, heavy regulatory burden and low savings and investment. Failure to tackle these will make another crisis inevitable. That in turn will need another bailout (Pakistan is already in its 24th Fund program) and yet more financial support from friendly countries, overburdened by Pakistan’s constant requests. 

The Shehbaz government has launched an elaborate plan to privatise and disinvest from state owned enterprises which have long been such a drain on the budget. Some two dozen firms including power distribution and generation companies have been identified for this purpose with top priority being accorded to the sale of the national airline, Pakistan International Airlines (PIA). This is said to be at the pre-bid stage with the official expectation for PIA’s privatization to be completed before the end of this year. However, progress in the overall privatization process has been slow with the overall economic environment obviously affecting it. 

That’s also the case with the government’s much publicized efforts to secure investment from Saudi Arabia and UAE, which has yet to materialize. The strategy to attract foreign direct investment should be part of a broader, coherent economic plan and not operate in a policy silo. Significant foreign investment will be elusive unless macroeconomic stability is established and internal political tensions ended. 

Instead of relying on piecemeal economic management, the government needs a credible economic plan which is based on a longer-term vision and involves wide ranging structural reforms as well as investment in human development – in education, health and a skilled workforce. Whether the government has the ability and political will to do this is an open question. 

- Maleeha Lodhi is a former Pakistani ambassador to the US, UK & UN. Twitter @LodhiMaleeha