Waiting for a lifeline

THE spectacle of desperate men and women thronging the shops for subsidised flour provides just one glimpse of the worsening level of privation. A father of six died in a stampede in Mirpurkhas recently while queuing for the commodity. The rising cost of living has pushed more people into destitution. It’s an extremely grim situation with no sign of improvement in the economic outlook. The worst is still to come. But our economic czar is busy showing a rosy picture.

In the midst of the serious financial crunch and spiralling inflation, a finance ministry ad in print and electronic media tries to assure us that the country is on the path to a remarkable economic recovery. It claims to have saved the country from default and stabilised the economy. One wonders if our finance minister is just in a state of denial or is it merely a game of playing with figures. It will be a grave mistake if the government believes it can regain its lost political capital by falsifying data.

Such claims are far from reality. Neither are we safe from a risk of default nor is there any sign of economic recovery. The biggest joke is the claim of currency stabilisation. It reflects Finance Minister Ishaq Dar’s obsession with keeping the value of the dollar artificially low. That has been a major reason for the stalemate in the negotiations with the IMF for the next tranche of the bailout package. The next round of talks with the Fund has already been delayed by more than two months.

The free float of the rupee has been a critical condition for the resumption of negotiations with the Fund, aside from some other measures including raising tax revenue and reducing subsidies. The government has been trying to avoid taking these tough but necessary steps for political reasons.

Key economic reform can no longer be put on the back burner.

Dar’s insistence on keeping the value of the dollar artificially low has created a very dangerous situation, encouraging the currency black market and strengthening the hawala system. The large gap between the official and open market rates has caused a huge fall in remittances sent through banking channels. The finance minister’s fixation with controlling the currency rate has cost the country dearly.

The deadlock in the talks with the lending agency and delay in the payment of the next tranche has also affected our borrowing from other multilateral agencies and the expected flow of funds from friendly countries, causing our foreign exchange reserves to fall to a dangerous level. But the finance minister has remained in a state of denial.

Dar has been under the illusion that the Fund could be made to come down to his terms. It has also been extremely difficult for the fledgling coalition administration facing a formidable opposition to increase the tax burden fuelling inflation. Indeed, this will increase hardship for the people. But the government has no option other than to swallow the bitter pill. Further delay in the IMF bailout package could be disastrous.

With the prospect of sovereign default staring us in the face, the prime minister seems to have finally realised the gravity of the situation, calling on the IMF for resumption of negotiations. But there is no indication that formal negotiations could be resumed without a firm commitment from the government to implement the conditionalities that have been agreed upon.

Some prior actions such as devaluation of the rupee and increase in the levy on petroleum products would also be required before the talks. There is no indication the IMF team would be coming to Islamabad in the next few days as announced by the prime minister. Instead, IMF officials met the finance minister on the sidelines of the recently concluded donor conference in Geneva. There has not been any indication of a breakthrough in the talks.

Addressing the conference where donors pledged nearly $10 billion in aid to help Pakistan rehabilitate the millions of flood victims and rebuild the infrastructure destroyed by the disaster, the prime minister asked the IMF for a pause in its demands for economic reforms before releasing more financial aid. He said Pakistan needed “breathing space” while the country deals with the effects of the devastating floods.

There may be a possibility of the lending agency easing some conditionalities in view of the economic losses caused by the climate-related disaster that affected one-third of the country last year, but there is no way the Fund would agree to postpone some key reforms to improve the country’s worsening fiscal situation. The huge fall in revenue in recent months makes it harder to put the key economic reforms on the back burner.

A resumption of the IMF programme is certainly not all that is needed to address Pakistan’s current economic troubles, but it is a crucial stepping stone to acquiring other much-needed sources of financing. It is not just the external debt, but mainly the massive internal debt that has brought the country close to bankruptcy. The major problem is that this nation of more than 220 million people has been living beyond its means for a very long time and borrowing money even to run the state.

It is certainly not for the first time the country is on the brink of financial collapse. We have many times in the past found ourselves in the proverbial ICU and been resuscitated, of course with some outside help. We are living in perpetual hope of being salvaged by our external benefactors. It may happen again, but that would not take us out of the woods completely.

As in the past, this time too we may be able to avoid the immediate threat of default with the support of some friendly countries. But our perennial economic problems will not go away with the lifelines thrown by lending agencies and friendly countries. The situation has gone beyond a patch-up job.

The failure to address fundamental structural problems will keep the country trapped in a perpetual financial crisis, presenting the biggest threat to our national security. Economic dependence also compromises our sovereignty. Instead of waiting for a lifeline to bail us out, we need to take tough reform measures before it is too late.

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