June 16, 2022
ISLAMABAD – THE slide seems unstoppable. The finance minister’s balancing act in the budget has failed to end the anxiety. The free fall of the rupee against the dollar continues as inflation marks a new high. The government’s hopes of sealing the IMF deal and the promise of a bailout from friendly countries have yet to be realised. The spectre of default stares us in the face.
Both the government and the opposition seem to agree on the severity of the situation but blame each other for the crisis. With the reversal of their respective roles, the narrative has also changed. Just a few months ago, while in the opposition, the PML-N was out on the streets protesting against the spiralling cost of living and accusing the PTI government of selling out to the IMF.
But now in government, the PML-N leaders’ tenor has changed completely. Inflation is being driven by rising international commodity prices, we are now told. External financial support is deemed critical to prevent insolvency. While conceding that the increase in fuel and electricity prices will stoke inflation, the finance minister contends that the measures were necessary in order to reverse the devastation caused by mismanagement in the past four years.
Miftah Ismail’s budget speech echoed the PTI finance ministers’ accusatory rhetoric blaming successive governments for the mess. He has promised to put the economy back on track. While warning of tough times ahead, he has pledged to set “strong foundations of economic development that is based on sustainable growth”.
It is politics that has put the country’s economy in a perpetual state of crisis.
It is a familiar mantra that was adopted by previous finance ministers as well. It is certainly a very tall order given the short span of the government’s term. The budgetary proposals are not very different from the previous ones except for some change in emphasis and the tweaking of taxation measures.
As one senior PML-N leader admitted, the budget proposals reflect the agreement with the IMF made by the previous government. There are no fundamental structural changes that could ensure sustainable economic growth. The budget document also reveals the predicament of a government trying to meet IMF requirements, with an eye on the coming elections. Giving the narrow political and fiscal space available, there is little room for initiating any structural reform. In fact, it is more a matter of how to manage the economy and prevent an economic meltdown.
Most economists consider the growth target of five per cent set in the budget and keeping the inflation rate to slightly over 11pc implausible. It is all about keeping the failing economy afloat with external support. That has been the story of our economic policy over the decades, irrespective of who has been in power. Any claim of wizardry seems far-fetched.
Not surprisingly, in a role reversal, the PTI is now shouting itself hoarse, accusing the PML-N-led coalition government of surrendering to IMF diktat. Imran Khan rejected the budget, terming it ‘anti-people’ and ‘anti-business’.
His warning against increasing petroleum and electricity charges is no different from the statements made by the PML-N and other parties when they were in the opposition. Surely the former prime minister cannot be held responsible for all that has gone wrong with the economy, but some of his economic policies and financial measures have certainly worsened the crisis.
During his almost four years in office, Imran Khan struggled to chart the clear policy direction required to not only stabilise the economy but also initiate the much-needed structural reforms. The PTI government has an unenviable record of having four finance ministers in less than four years.
Curiously, when the economy showed signs of stabilisation in the third year, he suddenly brought a new finance minister — a banker who took a complete about-turn on policy direction, breaking away from the course of stabilisation. He went for a growth strategy without considering macroeconomic weaknesses. Last year, the PTI government’s budget reflected that new expansionary economic policy. However, most of the budgetary measures were later rolled back under IMF pressure. That helped pave the way for a new tranche from the Fund announced in February this year.
The PTI government had agreed to increase petroleum prices and rationalise electricity tariff. Yet weeks after the agreement, the prime minister announced a major cut in petroleum prices and the lowering of electricity tariffs.
It was a reckless populist political move on the eve of the no-confidence vote, causing massive fiscal haemorrhaging. The decision could not save Imran Khan’s government but has done irreparable financial damage and made negotiations with the IMF much harder.
Even as he criticises the policy of the current government, the former prime minister must also take responsibility for aggravating the crisis. The PTI may boast of having achieved an economic growth rate of 6pc in the last financial year but that has also worsened the current account deficit.
It was the same situation in the last year of the previous PML-N government that had recorded a similar growth rate, which was accompanied by a balance-of-payments problem, leaving no option for the PTI government but to go to the IMF.
This has been a vicious cycle from which the economy has never come out. It is more of a political problem that has put the economy in a perpetual state of crisis. No wonder we have the dubious record of approaching the IMF for a bailout 22 times. Rarely have we completed the programme.
There has never been any serious effort to carry out fundamental structural reforms to put the country on the path of sustainable economic growth. We remain largely a rentier economy dependent on external help, with little incentive to break the shackles.
Political instability perpetuated by the frequent interruption of the democratic political process has been one of the major reasons for the absence of a long-term reform strategy needed for sustainable economic growth. There is a need for continuity in policy. That can only happen if all political forces agree on some basic charter of economy.