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Pakistan’s Sticky Wicket

Imminent Economic Challenges for Imran Khan

Meena Menon (meenamenon@gmail.com) is an independent journalist and author based in Mumbai.

As the subcontinent debates whether Pakistani Prime Minister Imran Khan can again demonstrate his well-known kaptaani élan to pull his country out of the crossfire of fundamentalism, terrorism and problems of development, one should not disregard that it is the mounting burden of fiscal mismanagement, among other factors, that has rendered various pro-poor strategies inert. Choosing the right options for fiscal management will be the most pressing policy decision facing him.

Imran Khan will lead Pakistan at an unenviable time in its history, perhaps more so than ever before. The country faces a balance of payments (BoP) crisis, increasing budget deficit, spiralling imports, and declining foreign currency reserves and the Pakistani rupee (PKR) has been devalued three times since December 2017. The economy needs an urgent bailout; the United States (US) is clamping hard on tackling terrorism and its social sectors are in dire need of a transformation. Inclusive growth and fiscal discipline have assumed grave importance at a time when its macroeconomic indicators are floundering and the public sector enterprises, bereft of the promised restructuring, continue to bleed. The time has come for desperate action, perhaps another bailout since the last one of $6.6 billion from the International Monetary Fund (IMF) in 2013. Jailing former Prime Minister Nawaz Sharif to ensure a Pakistan Muslim League (Nawaz) (PML[N]) defeat has not helped the political situation to revive. There are hectic debates on the army’s role in an election, which by some accounts has been neither free nor fair. The challenges before Khan are many—political, social, economic, and diplomatic, particularly peace with India, are probably a few to mention.

On the economy front it is a critical time for Pakistan, despite the optimism exhibited during the budget earlier this year. In his annual budget speech for 2018–19, the finance minister, Miftah Ismail, declared that since the PML(N) government took over in 2013, the proje­cted gross domestic product (GDP) growth rate was at 5.8%, the highest in the last 13 years, from 2.8% in the preceding regime; the tax to GDP ratio would increase to 13.2% in 2018–19; the foreign direct investment has already increased to $2.7 billion in the financial year (FY 2017) from $1.3 billion in 2013 and foreign exchange reserves stood at $11 billion. A total of $223 billion was invested in the economy from both domestic and foreign sources over the five years as compared to $140 billion during 2008–13. He claimed that in the past five years PML(N) had reduced average inflation to 3.8% from 12% and food inflation to 2%; and cut back on the 16 to 18 hours of load-shedding with increased power generation.

The biggest feather in the PML(N)’s cap has been the expansion of capacity in the power sector. Over a period of 66 years, the country had an installed capacity of 20,000 megawatt (MW) only, while the PML(N) government in the last five years claimed to have added 12,230 MW. According to the Economic Survey the installed electricity capacity in the country recorded a growth of 30%, from 22,812 MW in FY 2012–13 to 29,573 MW in February 2018.

But, such rapid expansion has brought back the bane of circular debt along with it. According to the International Monetary Fund (IMF),1 the accumulation of new payment arrears of power distribution companies (so-called “circular debt”)—which was brought to near zero at end-FY 2015–16—has resumed, reaching PKR 193 billion (0.5% of GDP) since July 2016, with an accumulated stock of such arrears of PKR 514 billion (1.5% of GDP) by end-December 2017.

The Pakistan Economic Survey, a flagship publication of the Ministry of Finance, Government of Pakistan, had already sounded a note of caution against the unfavourable BoP situation looming large on the economy:

… particularly the unfavourable balance of payments position due to a widening current account deficit (CAD) along with less than expected foreign inflows and a decline in exports in the last two to three years. Slow global growth in international trade flows was an external factor that contributed to the low export growth.

The CAD in 2017–18 is estimated at $15.7 billion, which is 5% of the GDP and is higher than the previous year. This has resulted in increased borrowing from external sources. The total public debt, constituting 66.6% of the GDP, stood at PKR 22,820 billion in end of December 2017, of which the total debt of the government was PKR 20,878 billion.2 The government consoles itself that even developed countries like the US, the United Kingdom (UK) and Japan and developing ones like India have significant debt and maintain levels as high as 80% to over 100% of their GDPs, well over Pakistan’s debt to GDP levels.

Development Management

Over the past five years, the expenditure on the 17 “pro-poor” sectors, including agriculture, justice, roads, law and order, has experienced a gradual rise from 7.7% of the GDP in 2013–14, to 8.3% in 2014–15, and 9.3% in 2015–16. In 2016–17 this stood at PKR 3,027.7 billion, which is 9.5% of GDP. Various policy changes seem to ensure a growth in the agriculture sector (which accounts for 18.9% of the GDP). The sector received a boost with an infusion of higher rural credit and support from the Prime Minister’s Kissan Package. On the other hand, the expenditure on social security and welfare schemes, which includes the Benazir Income Support Programme, was PKR 2,59,759 million.

However, despite an increase in development spending from PKR 348 billion in 2012–13 to PKR 733 billion in 2016–17, the Pakistan Poverty Alleviation Fund received a modest allocation of PKR 688 million, to cater to more than a quarter of the population living in poverty and distress, especially the 29.5% living below the poverty line.3 The expenditure on key social sectors, such as health and education, is far from ideal and reflects their back­wardness. Health expenditure increased marginally to 0.91% during the fiscal year 2016–17 from 0.77% recorded in 2015–16.4 The expenditure on education as a percentage of GDP was 2.2% in FY 2017 compared to 2.3% of GDP in FY 2016. Besides the country has low net enrolment rates—56% for males and 51% for females.

Futher, the Economic Survey notes that

the job is not fully done yet. Pakistan has to achieve high and inclusive economic growth, going forward, through continuity and consistency in macroeconomic policies. Fiscal discipline together with political and regional stability will be the key to a sustained continuation of the recently achieved growth momentum.

And that is where perhaps the problem lies.

Fiscal Management

While the PML(N) government braved the fiscal challenges by promoting a sustained growth rate and reducing inflation to 3.4%, it could not curb the fiscal deficit reaching 5.8% of the GDP against a revised target of 4.2%, which according to the Economic Survey (2017–18) was due to an increase in project loans on account of China–Pakistan Economic Corridor (CPEC)-related activities, among other reasons.

Not many in Pakistan pay taxes, and while the overall tax to GDP ratio has increased from 9.8% during FY 2013 to 12.6% during FY 2016, it fell to 12.4% in FY 2017.5 The government has been taking several measures to net more taxpayers under the Broadening of Tax Base (BTB) drive and from 2013–14 to 2016–17, the government issued 5,13,468 notices and enforced 2,03,701 income tax returns. The number of those who filed income tax returns, which was around 7,50,000 for the tax year 2012, has crossed 1.3 million in the tax year 2016. The population, according to provisional results of the 2017 census, is 207.77 million as compared to 132.35 million back in 1998. These efforts for the collection of taxes from a potentially large taxpaying public leaves much to be desired.

The IMF assessment had already warned of a BoP crisis in its country report of March 2018.6 According to the report the combined accumulated losses by public sector enterprises now exceed PKR 1.2 trillion (4% of GDP), which could eventually lead to a sizeable demand for privatisation, and the restructuring of key loss-making public sector enterprises have been largely on hold. The man set to assume the mantle of finance minister, Asad Umar, has already put privatising public enterprises on top of his agenda but it will probably take more than that to tide over this impending crisis.

Despite continued recovery of exports and some moderation of import growth, the current account deficit is expected to widen to $15.7 billion (4.8% of GDP) this year, the IMF report said. In the medium term, the current account deficit is expected to remain elevated at about 3.8% of GDP, owing to continued real exchange rate misalignment and slow recovery of remittances. Gross international reserves are expected to further weaken to $12.1 billion (2.2 months of imports) this year, with risks skewed to the downside. Reserves are expected to continue declining in the medium term. It had also projected that the elevated current account deficit and rising external debt service, in part driven by CPEC-related outflows (loan repayments and profit repatriation), are expected to lead to higher external financing needs, which are expected to rise from $21.5 billion (7.1% of GDP) in FY 2016–17 to around $45 billion by FY 2022–23 (9.9% of GDP).

Pakistan has continually put defence spending above development. In contrast to development spending, the defence budget was hiked by 18% to PKR 1,100 billion or PKR 1.1 trillion ($9.6 billion). The Dawn reported that the increase represented the highest growth in the defence budget in over a decade, as the allocation was 10.22% greater than the revised estimate of PKR 998 million for the present financial year. The defence expenditure is 21% of the total budget outlay for the next year and 3.2% of the GDP.7

Terrorism too has cost Pakistan in more ways than one and in the last 17 years, the direct and indirect cost incurred by Pakistan due to incidents of terrorism totalled $126.79 billion equivalent to PKR 10,762.64 billion.8

Anti-terrorism Strategies

Equally along with an economic uplift, all eyes will be on the new government’s policy to tackle terrorism, its policy on Afghanistan and whether it can truly function independently. While Pakistan is potentially set to demand aid of $12 billion from the IMF, according to news reports, there is pressure from the US on the IMF to not give in. Analysts in Pakistan have a sense of déjà vu of another IMF bailout, and they anticipate that the situation is not to be resolved so easily. The US has reportedly stopped military training for Pakistani personnel for the first time since the beginning of 2018; it has also announced a massive cut in security assistance.9

Khan and his party, the Pakistan Tehreek-e-Insaf (PTI) have been bitter critics of the Central Intelligence Agency-sponsored drone attacks to target terrorists in the border areas of Pakistan and Afghanistan, on the grounds of high civilian damage. Lawyers who approached the Peshawar High Court had received a favourable order demanding a tribunal to investigate these attacks in which large numbers of people were killed in a bizarre replay of collateral damage the Americans often seem to inflict.

His anti-US diatribe and the blockade of North Atlantic Treaty Organization supply vehicles to Afghanistan, crucial to the US war against terror, cannot stand in good stead; though, he did make the right noises in his opening speech after his victory was more or less certain in the election. Those who wrote him off as “a poster boy” for the Taliban and “Im the Dim” must be ruing the day he takes over as Prime Minister.

With President Donald Trump’s visceral comments on Pakistan and its gradual estrangement from the US, though it is still vital for the war on terror, Pakistan is relying more on its proximity to China, which has boosted its economy with funding the CPEC and many other projects. It is banking on the CPEC investment to the tune of $60 billion by 2030 and claims over 30,000 jobs have been created. Meanwhile, it is showing more bonhomie towards Russia, even signing an agreement for military training.

Political economists like S Akbar Zaidi have been critical since long of the government not taking “unpleasant” steps, such as cutting defence expenditure or increasing tax collection to improve the economy instead of rushing for a bailout. Such desperate steps have been taken time and again but could not correct the many ills in the economy, which is crying out for structural changes from within, and not Band-Aid to the tune of billions. Some economists argue that the picture is perhaps not as gloomy; the economy was robust and it would survive with some austerity measures. The IMF has in the past imposed stringent conditions on Pakistan for disbursing loans and that could lead to less expenditure on key social sectors. At a time like this, Pakistan is looking to other countries like China and Saudi Arabia for aid but that may not resolve the problems it will face with more borrowings, rising imports, and a growing inability to repay. The vicious circle will close in again on a country that needs external aid for its survival time and again. That is the real challenge for Imran Khan. The question is whether he will be up to a much-needed captain’s innings.

Notes

1 Pakistan IMF Country Report No 18/78, March 2018.

2 Pakistan Economic Survey 2017–18, Ministry of Finance, Government of Pakistan.

3 Pakistan Economic Survey 2015–16, Ministry of Finance, Government of Pakistan.

4 Pakistan Economic Survey 2017–18, Ministry of Finance, Government of Pakistan.

5 Pakistan Economic Survey 2017–18, Finance Division, Government of Pakistan.

6 Pakistan IMF Country Report No 18/78, March 2018.

7 https://www.dawn.com/news/1404337.

8 Pakistan Economic Survey 2017–18, Finance Division, Government of Pakistan.

9 https://www.reuters.com/article/us-pakistan-usa-military-exclusive/exclu....

Updated On : 30th Aug, 2018

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