While it remains too early to say definitively, several indicators suggest that Pakistan’s economy may have withstood the worst of its recent challenges.
There were serious concerns that, due to pressure from the IMF to relax import controls and float the exchange rate, the rupee could suffer a further free fall. However, after hitting a record low of Rs 335 on September 5, the rupee is regaining ground, stabilizing at around Rs 292 per US dollar, a level that the caretakers inherited.
Foreign exchange reserves have exceeded $13 billion, including $5.5 billion held by commercial banks. Even with a notable increase in fuel prices, the inflation rate has slowed and now stands at 27.4%.
As caretaker federal ministers take charge of their respective ministries, they face a daunting task. The latest in, the federal privatization minister, rightly directs attention to Pakistan International Airlines (PIA) and Pakistan Steel Mills (PSM), the two struggling state-owned enterprises that have consistently suffered huge losses without resolution.
Although still operational, PIA reports monthly losses of Rs 13 billion, while PSM, closed since 2015, continues to pay salaries to around 3,100 employees. The sustainability of recent financial support to PIA raises questions about its alignment with taxpayer interests, but the intensity with which a solution is found is a worthwhile effort.
The Energy Minister has been dealing with public outrage over exorbitant electricity bills received in August. Having chaired the 2019 energy sector inquiry committee, he is knowledgeable about the measures needed to improve the efficiency of the energy sector.
While commendable efforts are being made to implement anti-theft measures in the case of electricity and gas, it is equally crucial to implement some of the routine recommendations outlined in the committee’s report. Interestingly, despite the committees’ suggestion of experience-driven leadership in the Power Ministry, the government is reportedly contemplating going in the opposite direction by appointing bureaucrats as CEOs to run several power companies.
Meanwhile, the Minister of Trade and Industry is vigorously pursuing ambitious targets, including a more than 35% increase in exports in the short term. For years, successive governments have been setting high export targets but have not undertaken any serious reforms.
As a result, those goals remain on paper and exports have barely increased over the past 15 years. On the other hand, Pakistan’s share in world markets has been declining annually by approximately 1.45%.
Furthermore, no attention was paid to expanding the export basket, as most non-textile industries were content to sell into the protected domestic market.
Taking into account the current economic panorama and the conditions imposed by the IMF, granting subsidies would be impossible. Concerns remain that the government could go down a populist route by seeking more taxes on imports to appease powerful groups. This measure would significantly undo any efforts to curb smuggling and move the economy into the formal sector.
In a broader context, the main objective of the interim government is to facilitate the promised influx of between $30 billion and $50 billion in foreign investment over the next three to four years.
The previous administration expressed optimism that this investment could significantly improve productivity and transform arid lands into arable lands. Pakistan is anticipated to achieve self-sufficiency in food production, saving approximately $10 billion in foreign exchange and doubling current food exports from $5 billion to $10 billion.
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However, it is imperative to recognize that, while beneficial, foreign investment and short-term compliance measures are not long-term solutions. Successful transitions from aid-dependent to export-led growth, as seen in many developing countries, depend on major tax and trade policy reforms.
The importance of an independent and efficient judiciary has also played a crucial role in the implementation of economic reforms in many developing countries. In this context, the new chief justice’s stance against judicial activism should be seen as a breath of fresh air.
In conclusion, Pakistan’s economic woes may be gradually giving way to a new chapter. The effectiveness of the interim government in laying the groundwork to address the most pressing challenges (state-owned enterprise reforms, exchange rate stability, trade policy reforms and facilitation of planned inward investment) will be a boon to the incoming government.
While the path forward may be fraught with difficulties, putting the country on outward-oriented economic policies is vital to getting out of the current economic crisis.
The author currently serves as a WTO trade arbitrator. Previously, he served as Pakistan’s ambassador to the WTO and FAO representative to the United Nations in Geneva.
Published in The Express Tribune, September 25th2023.