It’s a depressingly familiar scenario. Pakistan’s economy once again faces the spectre of the twin deficits (fiscal as well as current account). Once more policymakers are scrambling to bid for foreign exchange inflows with the launch of bonds in international capital markets (according to some accounts, these are due to be floated in another two weeks).
The government has already slapped regulatory duty on a range of imports in a long overdue move. And once again, it seems that whichever government is elected in 2018 will be walking the familiar path to the IMF. It happened in 2008, and then again in 2013. Why should 2018 be any different?
Newly elected governments typically go to the IMF within the first six months of taking office, taking the plea that the previous administration brought the economy to its knees. They typically go for three to four year programs which focus on the same set of reforms that have been tried many times before in Pakistan.
These include controlling the fiscal deficit, allowing the exchange rate to float more freely, and loosening controls on foreign exchange markets among others. Some policy reform measures are also included, which are implemented half-heartedly if at all.
No party in power has ever succeeded in winning a second term in office. With such a short term horizon, politicians are hardly interested in taking decisions which will reap dividends over the longer term
At the end of three years, the country graduates from the programme, and much back slapping takes place all around. By the time the next election draws closer, the sitting government is back to its profligate ways, because how can you not spend when an election is round the corner? At the same time, attempts to prop up the currency gain urgency, because that is considered a matter of national pride.
Immediately after elections, matters tend to reach a point of no return and the (often new) Finance Minister heads to Washington, hat in hand. It doesn’t seem this would stop in 2018. If anything, the current account deficit is in a worse shape now than it has been in years, which only makes this scenario more urgent. It will be interesting to see how this plays out if the current government manages to get a second term. Who will they then blame for the mess?
No political government anywhere in the world wants to take difficult decisions in an election year. But our elected representatives take the cake when it comes to throwing fiscal caution to the winds and placating key voting lobbies after the first two to three years in power. This is not, however, entirely irrational. No prime minister in the country has completed a full term in office, and so far, there has been only one instance in 70 years where one democratically elected government has handed over power to the next.
Policy uncertainty is built into the system. Political governments don’t know how long they will last, and after two to three years, can safely bet that they will either be deposed soon, or will lose their party leadership somehow (assassinations, corruption charges, contempt proceedings — its all happened here).
No party in power has ever succeeded in winning a second term in office — when the PPP claimed it had achieved this feat in 1977, the election was exposed as being fraudulent in the extreme. With such a short term horizon, politicians are hardly interested in taking decisions which will reap dividends over the longer term. This is not to defend the instances of bad governance that this country has witnessed again and again. But it does explain why successive governments are not interested in structural reform.
The economy will likely limp along till mid 2018, with short term injections of capital being arranged through the bonds floatation and possibly bailouts from some friendly powers. Post elections, the government in power, whether it is the PML-N or any other, will likely negotiate a bailout package with the IFIs.
The writer is an economist and policy analyst based in Islamabad
Published in Daily Times, November 2nd 2017.