August 18 marks the second anniversary of the PTI government in office. The second half of the government’s second year in power was affected by Covid-19.
In fact, the pandemic is not over yet. Like anywhere else in the world, it will also continue to haunt Pakistan for some more time. That is why one would have to start with Pakistan’s response against Covid-19 while assessing the performance of the federal government’s first two years in office.
With the onset of Covid-19 in Pakistan, the federal government established a high-level decision-making body, the National Coordination Committee (NCC). The NCC could not be a substitute for the Council of Common Interests, yet the presence of federating units on this committee is helping narrow the differences on Covid-19 response between the federal government and the PPP led government of Sindh.
An empowered National Command and Operation Center (NCOC) to implement the decisions of the NCC is helping synergize and articulate a unified national response against the virus. The NCOC is not only collating, analysing and processing information on Covid-19 but is also equipping and strengthening health facilities based on this information through optimum use of available resources.
Pakistan’s response to Covid-19 is characterized by PM Khan’s clear tilt against a complete lockdown. Risk taker that he is, he took a risk by instituting a policy of smart lockdowns versus completely shutting down the economy. The decline in the number of new cases in August (so far) compared to the caseload in June-July, despite relaxation of lockdown, implies that the risk he has taken to maintain a balance between lives and livelihoods is paying off.
Serving 12 million households through Rs148 billion cash transfers under the Ehsaas Program was another plus point in the government’s response. Although the amount is no match to the hardships brought by Covid-19, yet these transfers did prevent wide-scale hunger and social unrest. Likewise, reduction in policy rate; provision of financing from the State Bank of Pakistan to industries for retaining their employees, and temporary relief from loan repayments did provide some economic protection to industries amid Covid-19.
PM Khan should also be given credit for initiating the global discussion on debt relief for developing countries. The move led to debt rescheduling from G7 countries.
With less than 7000 precious lives lost to Covid-19, and less than 1000 patient reportedly in critical condition as of today, Pakistan is in a much better situation than the scenarios predicted for it by WHO experts. One may call it good luck, herd immunity, better management, or something else, but would have to give credit to federal government (and for that matter to the provincial governments as well) for an effective national Covid-19 response so far.
Multilateral organizations including the IMF, World Bank, ADB, WTO and the FAO have warned of a global recession and a food crisis accompanying Covid-19. Pakistan cannot remain isolated from global and regional economic developments, so its economy will also be affected from this recession.
However, there are some signs of early economic recovery in Pakistan. Data reveals that the textile sector is getting new export orders. Likewise, consumption of energy (electricity, petrol, and diesel) is matching pre-Covid numbers. Sales of cement and Urea fertilizer are picking up, showing activity in the construction and agriculture sectors. Both the stock market and real estate are showing activity too. Automobile dealers have again started charging premium price for swift delivery of vehicle, indicating a rise in demand of new vehicles, perhaps due to the reduced policy rate. Inflation is ticking up, but it is predicted to remain in single digits as the major contributors for high inflation during the month of July remained perishable vegetables (pre-Eid prices) and 27 percent increase in petroleum prices.
Consider these developments against the major challenges facing the PTI government when it came into power. Those challenges include current account deficit (CAD: difference between import bill and export earning; During FY18, CAD was $16.19 billion or 6.1 percent of GDP), fiscal deficit (difference between income and expenditures), depleting foreign exchange reserves, energy circular debt, and loss making public-sector enterprises. After consuming all options of borrowing from friendly countries, the PTI government had to very reluctantly go to the lender of last resort — the IMF.
An IMF program is never pain-free. While bringing macroeconomic stability, it does negatively affect microeconomic stability. However, Covid-19 revealed that the government would have been very vulnerable had it not been in an IMF program. Pakistan was among the first countries to receive $1.4 billion emergency loan for Covid-19 response through IMF rapid financing instrument. As of today, its foreign exchange reserves have improved to $19.5 billion (highest in the last two years). It is worth mentioning here that a major chunk of the $12 billion State Bank reserves is from multilateral lending institutes. The help from ADB, World Bank, AIIB, and others would not have been possible without a letter of comfort from the IMF.
Under the IMF Extended Fund Facility Program, the government would have to put its house in order. Partly due to pre-Covid contractionary policies to reduce CAD and partly due to the lockdown, the CAD during FY 2019-20 stood at a five-year low both in terms of value ($2.96 billion) as well as in terms of percentage of GDP (1.1 percent of GDP). On managing fiscal deficit, FBR numbers do reveal an improvement both in tax collection as well as in tax-net expansion. However, a lot needs to be done to reform the FBR, enabling it to broaden the tax-net and shift to direct taxes rather than relying on regressive indirect taxes.
The energy circular debt is another challenge for the government, and the IMF has been suggesting comprehensive power-sector reforms. The power sector enquiry report launched earlier this year has provided a base for renegotiation of power purchasing agreements with independent power producers. PM Khan has already announced a breakthrough in these negotiations, which would result in a possible tariff reduction.
Determination of market-led exchange rate against major currencies was yet another challenge for the PTI government. Unable to artificially support the value of the rupee against the US dollar, the PTI government followed the policies of former PM Shahid Khaqan Abbasi and restricted SBP intervention in the forex market only when it is extremely necessary. During the last one year, speculation around the value of the rupee and panic buying of dollars remained under control. The government is also able to break the myth that depreciation of the value of the rupee will always lead to inflation.
Compliance with the Financial Action Task Force (FATF)’s action points is another area where the government must be given due credit; it has taken FATF observations seriously and is striving to bring its house in order. Irrespective of the outcome ofthe next FATF plenary, during the last two years Pakistan has successfully improved deficiencies in its laws and policies/procedures to control money laundering and terrorism financing. Giving momentum to the CPEC-II program under a CPEC authority is another plus in the performance sheet.
PM Khan is striving to resolve the housing problem of lower-middle income earners. During his second year in office, he has tried to give the construction industry a push. He approached the IMF to negotiate a limited time amnesty and fixed tax regime for his construction package. This helps builders. For end consumers, regulatory, fiscal and monetary incentives are being shaped up so that they may get an affordable mortgage.
Institutionalization of these reforms, all across the value chain from urban master planning and unlocking of land banks, to digitalizing approval systems for quick and automatic approvals, to rejuvenating sustainable systems for construction finance and mortgage finance by the State Bank of Pakistan would take some time. However, this is a step in the positive direction and may ease off the housing situation for middle income earners in the short to medium run.
While in my opinion the government’s performance is up to the mark in the above-mentioned areas, there are certain aspects of the economy where it needs to rethink its strategy for a midcourse correction. My pick includes revival of loss making public sector enterprises; control of inflationary trends of non-perishable food items (wheat/sugar); overcoming bureaucratic resistance to implement government policies; using digital fintech to assess credit worthiness of small and medium entrepreneurs for resolving their liquidity issues; increasing public sector investment in the agriculture sector; and forging political consensus on the economic way forward through improving the working relationship with the opposition in parliament. So far, though, let us cherish what the government achieved, despite Covid-19, during its first two years in power.
The writer heads the Sustainable Development Policy Institute.