Pakistan is passing through a critical juncture both politically and economically. As the country goes to polls in February 2024, the economy is running under an IMF nine-month umbrella that will be lifted in early March. Inflation is still very high, with low growth, high unemployment, and increasing poverty. These problems have emerged because of unsustainable fiscal position, high debt burden, and macroeconomic mismanagement practised by each and every government in the past.
The new government will, of course, be free to choose imprudence over prudence as in the past. However, as soon as the current macroeconomic discipline under an IMF program relaxes, the new government may find itself closer to default because foreign exchange reserves are already at a low level. Hence, it would be in the interest of the government as well as the country that it engages with the IMF to negotiate a medium-term programme before the current one ends.
It can only be hoped that the gravity of the economic situation persuades the new government to continue with prudent macroeconomic policies. If so, the first economic agenda of the government would be to reduce inflation and revive growth in the medium-term. Short-term pain must be borne to get to the medium to long-term betterment. The IMF in its recent review has warned that “Continued timely and consistent implementation of program policies remains critical, with no room for slippage.”
The priority of the government should be to revive growth, which is currently projected to be only 2 percent for Fiscal Year 2024, according to the IMF. However, efforts to revive economic growth should not be at the expense of more inflation. The new government should allow the State Bank of Pakistan to reign-in inflation which averaged at 29.2 percent at the close of last year.
While the economic agenda of the new government seems to be written on the wall, it will have very little policy options other than macroeconomic prudence to implement it.
To promote growth and contain inflation when the nominal interest rates are record high at 22 percent, the government will have little option to relax its fiscal policy. The monetary policy is expected to be gradually relaxed in the third or the fourth quarter of the current year, likely resulting in lowering of inflation. If both fiscal and monetary policies are relaxed in the current environment, it will create further debt distress, leading to a balance of payments crisis again in Pakistan. This point would be extremely hard to swallow for the new government, but it should remain content that monetary policy can be relaxed initially in its tenure.
The new government would still be able to run high budget deficits, but they must generate substantial revenues to meet non-interest expenditures to produce surpluses in their primary accounts. This will enable the new government to gradually spend more on development expenditure to promote investment and growth. The current government has done well to achieve a primary surplus of 0.4 percent of GDP. The new government must ensure that it achieves or surpasses this performance. It can only be done with fiscal prudence in containing expenditures and raising further revenues.
The unemployment rate was 6.3 percent in the year 2021. Data for later years had not been released by the Pakistan Bureau of Statistics (PBS). The IMF estimated the unemployment rate at 8.5 percent in 2023, which in its latest projection is expected to decline to 8.0 percent in 2024. The continuation of primary surpluses will increase the likelihood for both growth and employment to go up in Fiscal Year 24. The investment to GDP ratio was only 13.6 percent last year. Unless this goes up in following years, it is unlikely to reduce unemployment and increase real GDP. This also hinges on producing primary surpluses while allowing for substantial budget deficits. According to the State Bank of Pakistan, the budget deficit is expected to stay between 7 and 8 percent. What is crucial is to produce a primary surplus of 0.4 percent of GDP in the coming year and consistently more in later years according to the IMF.
It would be difficult to think that poverty reduction will not be an agenda of the new government. The World Bank estimates the poverty rate at 37.2 percent ($3.65/day 2017 purchasing power parity) of population in 2023. Although this is lower than the rate of 39.8 percent for 2018, there are three million more people in Pakistan in the last six years, because of the increase in population. Decline in GDP has retarded the speed of reduction in poverty rate. High growth in the years 2021 and 2022 mainly helped in poverty rate reduction. If the new government succeeds in the gradual revival of growth, the poverty rate is likely to come down further.
: With the decline in GDP impacting the poverty rate, it is imperative that poverty reduction remains on the agenda of the new government.
While the economic agenda of the new government seems to be written on the wall, it will have very little policy options other than macroeconomic prudence to implement it, aptly communicated by the IMF as “no room for slippage.” This, however, does not mean that good economic policies will be implemented automatically. As Pakistan has shown spectacular weaknesses in its economic policy formulation and implementation in the past, the probability of failure remains. If the new government succeeds in implementing economic reforms leading to sustainable improvements in all envisaged agenda items, namely, reduction in inflation, poverty, unemployment, and sustainable increase in growth, the new government will be long remembered for turning Pakistan’s economy in the right direction.