After weeks of delays and non-committal statements, the government looks to be coming around on its failure to pass the review of the IMF and work toward securing the next tranche in the bailout. Thursday’s $258 million injection was the first real inflow of dollars into the State Bank’s reserves in eight weeks, bringing the total holdings to $4.6 billion for the central bank, while commercial banks reportedly have another $5.84 billion for import payments of traders. The problem, however, remains that this is not nearly enough for Pakistan to meet both debt and import payment commitments over the course of the year.
Seeking the resumption of the IMF programme is extremely important to bring back some semblance of normalcy to our economic outlook. The key stumbling blocks, as ever, remain the readjustment of electricity and gas prices, an increase in interest rates, increasing tax revenues and letting the rupee revert to its market value instead of looking at artificial stabilisation methods.
An increase in interest rates is standard practice in a shrinking economy, to try and curtail spending habits and the financial systems retain more cash flow as a result. This should not be too difficult. Likewise, the government is considering adding a host of corporate and business tax mechanisms that, if implemented, should increase tax revenue substantially. The only question that remains on this is if the government is brave enough to actually follow through on this.
The other two policy changes are more difficult to swallow. The government is considering the loss of political capital too heavily and is thus delaying the energy price readjustments and market valuation of the rupee as a result. However, there is no righting this ship without letting the rupee find its own value at this point. Artificially looking to stabilise has caused more harm than good. Similarly, the circular debt in both electricity and gas remains uncontrollable, so rates must be readjusted.
There is a reason we have to take this path every few years. Successive governments make unsound policy decisions to gain short-term political capital at the expense of the country. If Imran Khan is to blame for the disastrous fuel subsidy last year, the Finance Minister should also perhaps introspect and recognise that his policy of pegging the rupee is no different, and is causing structural imbalances as well.