The PTI government has finally decided to disclose to the nation that it is going for a new IMF programme. It waited to disclose this until the eve of the finance minister’s departure to Bali to negotiate with the Fund team. This isn’t the first time that a government has sought an IMF loan programme, but I hope it is the last time.
In 2013, when the PML-N inherited the government from the PPP, the economy was under stress. At the time, economic growth in Pakistan stood at three percent, the inflation rate was eight percent, and our budget deficit was a staggering 8.2 percent. Our foreign reserves were low and decreasing to the extent that by February 2014 the State Bank of Pakistan (SBP) was left with only $2.5 billion.
International rating agencies such as Moody’s had given Pakistan’s economy a negative rating. Insufferable power and gas shortages were crippling the industry and our manufacturing sector was hardly growing. Under such tough circumstances, the PML-N negotiated an IMF programme that was back-loaded, which means that most of the money we received were in later quarters and in the first year our repayment to the IMF from previous loans was actually more than the tranche we received from the Fund.
An IMF programme obviously implies belt-tightening and that’s what the PML-N government did. In the very first budget, we cut the non-salary current expenditures of the government by 30 percent. But we increased expenditures under four heads.
One, development expenditures. Pakistan had a woeful shortage of roads, power and gas. Yet many projects, such as the Tarbela extension projects and the Neelum-Jhelum hydro project, were not being completed due to a shortage of funds. Two, defence expenditures. Again, we had serious law and order problems in different parts of the country and proper funding was required. Three, we increased funding for the Benazir Income Support Programme, which helped the poorest of the poor. We increased both the monthly stipends and the number of recipients and increased the allocation from Rs40 billion to Rs125 billion in five years.
Four, we increased the money going to the provinces, as mandated by the NFC award. In five years, our government increased provincial transfers from Rs1,200 billion to Rs2,400 billion, approximately.
In five years, including three years under an IMF programme, we were able to keep our inflation under five percent, our average deficit under 5.5 percent, increase growth every year, ending our term with a growth rate of 5.8 percent – the highest in 10 years – install 11,000 MWs of power-generation capacity, and build 1,700 kilometres of motorways. The stock market went from 19,000 points to over 54,000 points. But because of political uncertainty, it had come down to 47,000 points by the time we left in May 2018, still about 10,000 points above Monday’s close.
Although we showed a good performance overall, according to me, we made two mistakes. First, we weren’t able to privatise public-sector enterprises, such as PIA and electricity-generation or distribution companies. While the opposition did block our efforts, the onus was still on us to do so. The opposition initially also opposed CPEC, but the then PM Nawaz Sharif and then planning minister Ahsan Iqbal took everyone into confidence. By the fourth year, even the then Khyber Pakhtunkhwa CM Pervez Khattak started attending CPEC ministerial meetings.
The second mistake we made was to not devalue the currency in 2016. Nawaz Sharif was always a believer in a strong currency that allowed people on fixed and low incomes to enjoy a higher standard of living. To me, that meant keeping inflation low and alleviating the need to devalue. But because our inflation rate, albeit low, was still higher than that of our trading partners, and some of our competing countries were devaluing, keeping the rupee fixed at a nominal exchange rate meant that our exports were losing competitiveness and our central bank was subsidising imports.
This policy resulted in high current account deficits in the last two years and a depletion of foreign reserves. Even so, when we left in May, SBP reserves were $10 billion and country’s reserves stood at $16 billion.
To look a little more into the current account deficit, our exports of $23 billion plus remittances worth $20 billion give us around $43 billion. Add another $2 billion from foreign direct investment. But our imports are north of $58 billion. This leaves a gap of $13 billion, which is unsustainable. (We can sustain a deficit of around $3 billion to $4 billion).
Before we left, we devalued the currency by 10 percent and the caretakers did so by another 10 percent. This means that the rupee has more or less found its right value. The onus now is on the PTI government to keep inflation low so as to not render our industry, which is finally getting the energy it needs, uncompetitive. Our central bank, perhaps prodded by the new finance minister, has already increased its policy rate by a full two percent. It’s not clear to me why, after the massive devaluation, a further weakening of aggregate demand is needed to slow down imports. Many macroeconomists believe that a government’s stance on external trade should be expressed through exchange rates and not through interest rates.
The PTI today has inherited a far more resilient economy than we did in 2013. But while we didn’t waste time in blaming the previous PPP government, the PTI government acts as though blaming the PML-N for every imaginable problem is a panacea for all of Pakistan’s problems. What is truly unfortunate is how ministers have talked down our economy, and how this has resulted in investors losing confidence. Since the PML-N’s term has ended, our stock market has lost 20 percent of its value. Who is answerable for that?
The government has also misinformed our people. Whereas PM Khan says our external debt is $90 billion, it was actually $75 billion on June 30, 2018. He’s adding figures for private-sector borrowing to the government debt figures. That’s just wrong. When we came into power, Pakistan’s external debt was $48 billion. When we left, we had taken an additional $27 billion in external debt. But just the losses in the stock market on Monday, as it was dealing with the PTI government’s ineptitude, were $1.9 billion. Since the market’s peak in 2017, investors have lost $40 billion.
The PTI government is also always blaming us for taking on a huge total debt. But our debt-to-GDP ratio is still better than that of Japan, Italy, Singapore, America and Sri Lanka – and only a shade higher than India. And what is truly ironic is that this year the PTI government, with all its austerity and auctioning of buffaloes, will incur higher debt than we took on average in our five years.
As we wish our finance minister good luck for his Bali trip, we hope he won’t negotiate a programme that burdens the poor, results in high inflation, and destroys growth. And finally, despite this U-turn by the PTI government and in spite of PM Khan’s pledge, I hope the prime minister will live long.
The writer has served as federal minister for finance, revenue and economic Affairs.