Economics Beyond Political Roulette: With IMF Talks Looming, A New Govt Must Think Outside Box

Economic decision-makers in administrations since 2008, including interim governments, have shown a lack of innovative thinking—specifically, their inability to enhance negotiation capabilities with donors

Economics Beyond Political Roulette: With IMF Talks Looming, A New Govt Must Think Outside Box

The coalescence of politics and economics is a longstanding global phenomenon, yet in Pakistan, there is scant divergence among political parties regarding economic policies. This is predominantly attributed to the stringent imposition of time-bound quantitative conditions and structural benchmarks, which have become progressively more draconian and forthright. These measures stem from an IMF program that is increasingly tied to austerity.

Over the past decade and a half, every government in Pakistan, from 2008, has sought financial assistance from the IMF. Presently, the country is operating under its 23rd IMF program, with anticipation building for the 24th once the current arrangement concludes. Despite repeated commitments to implement reforms in both the energy and tax sectors, agreed upon across numerous programs and even within single programs, these vital changes still awaits action.

The primary emphasis remains on boosting overall revenue collection, which excessively relies on indirect taxes, constituting over 60% of all collections. While these taxes are convenient to gather, it is crucial to acknowledge their disproportionate impact on the less affluent compared to the wealthy. This oversight could potentially further fuel dissatisfaction, latently escalating into widespread unrest unless urgent remedial actions are implemented.

A significant portion of the 2023-24 budget, approximately 92%, is allocated for current expenditure. The primary beneficiaries include civilian and military stakeholders, the maintenance of a state employee pension system funded entirely by taxpayers, and the necessity to secure substantial loans, particularly domestically, in the absence of expected foreign inflows. With the anticipated $6.1 billion from foreign commercial banks and the inability to issue debt equity due to the country's poor credit rating, the burden of domestic interest bill has proliferated significantly.

The caretaker government setup, which portrayed itself as one making ‘informed’ choices, should be held accountable for a staggering 185% surge in domestic borrowing from 1 July 2023 to 19 January 2024, compared to the corresponding period the previous year. During Ishaq Dar's tenure as finance minister, the recklessness extended to a 21% increase in current expenditure over the budget set by his predecessor, Miftah Ismail. Additionally, Dar escalated domestic debt servicing costs by 39.54% during the same timeframe.

Despite a recent World Bank report revealing alarmingly high poverty rates of 38%, only a meagre 3% of the current year's budget has been allocated for the poor and vulnerable through the Benazir Income Support Programme. Furthermore, subsidies, comprising approximately 7% of current expenditure, continue to lack targeting, with over 90% directed towards the inefficiently managed energy sector, including payments to privately owned entities like K-Electric for tariff equalisation.

It is noteworthy that the PML-N government's decision during its 2013-18 tenure to enter contracts with foreign independent power producers (IPPs), which prioritised the interests of these producers over those of Pakistani consumers, is exacerbating the continuous surge in electricity tariffs. Moreover, this decision has led to challenges in meeting contractual commitments with the IPPs, primarily due to dwindling foreign exchange reserves.

The K-Electric case underscores the necessity for a prompt reassessment of the widely held belief that privatisation is the panacea for all challenges. This is particularly crucial in the context of implementing policy reforms that would prohibit privatised entities from availing subsidies funded by taxpayers, and simultaneously, ensuring that the private sector doesn't attain a monopolistic position.

Equally startling is the clear endorsement from the IMF, not only for the revised budget for the current fiscal year, which was approved by parliament on 27 June 2023, but also for the inflationary steps taken by the interim government, notably the increase in domestic borrowing. This support is evident in the Staff Level Agreement reached during the first review on 15 November 2023, under the ongoing Standby Arrangement.

The conclusion of the general election is a pivotal moment in the democratic process. Here, the question of its democratic nature is a debate better suited for another occasion. Nevertheless, it is crucial to recognise that the formation of a government is still a work in progress. There are crucial lessons for the upcoming government, be it a single-party or an increasingly likely coalition, as they prepare to present the 2024-25 budget.

These lessons include recognising three key realities. Firstly, the economic policies supported so far, often with IMF backing, have reinforced elite influence, albeit with variations in the favoured elite across administrations. And they have simultaneously eroded the quality of life for the working and middles class.

Secondly, economic decision-makers in administrations since 2008, including interim governments, have shown a lack of innovative thinking—specifically, their inability to enhance negotiation capabilities with donors through prudent reduction of current expenditure. Moreover, there has been a notable absence of the fortitude needed to push for the implementation of politically challenging reforms.

Lastly, the voices of independent domestic economists have been muted by successive finance ministers, who often appoint them to economic advisory councils under the finance minister's chairmanship. Many of these economists have either succumbed to flawed policy decisions or resigned from the councils in protest.

The politics of hate has led a stark polarisation among the electorate, not only in various Western nations like the US but also excessively within Pakistan.

Some argue that the unexpectedly weak underperformance of the PML-N was due to the assumption among its supporters that victory was assured, leading to apathy towards voting. However, this explanation may be overly simplistic, as numerous studies indicate that campaigns based on hatred and insults do little to garner voter support. Such a strategy, evident in speeches given by Nawaz Sharif and Maryam Nawaz at recent rallies and public gatherings, contrasts with the approach of the Pakistan People’s Party (PPP), which notably avoids such tactics.

Another aspect that failed to resonate with the public was the simplistic narrative suggesting that prices under the PML-N were considerably lower in 2017 compared to today. It's crucial to contextualise that prices naturally increase over time, but also that the PML-N administration deferred necessary administrative measures during its 2013-18 tenure, such as increasing gas prices. Additionally, in 2018, the country faced its highest-ever current account deficit of $15 billion, a result of flawed policies aimed at controlling the rupee-dollar exchange rate and heavy reliance on foreign borrowing. These factors ultimately compelled the subsequent government to seek assistance from the IMF.

One might be inclined to propose that academics of Pakistani origin, currently employed in foreign universities—ideally a minimum of three—be considered for key economic roles instead of retired officials from multilateral agencies. The latter group has often demonstrated a bias towards donor conditions, which unfortunately exacerbates the challenges faced by the average citizen in making ends meet.

While these suggestions may appear audacious and unconventional, the repetition of familiar faces and worn-out policies among finance ministers has only deepened the economic abyss.

One is reminded of Einstein's famous quote that insanity is repeating the same actions while anticipating different outcomes. Therefore, a new strategy is crucial, emphasising the attraction of foreign direct investment (FDI) alongside robust domestic economic policies to deliver real benefits for the people. This should bring home to us the significance of steering clear of the errors observed in agreements made between 2013 and 2018.

The author is currently pursuing his Bachelors of Law at the University of London. He writes extensively on Public International Law, Governance, Domestic and International Socio-economic, Political and Legal Affairs.