Going beyond firefighting

In the six weeks since he assumed office, not only has Finance Minister Muhammad Aurangzeb completed his homework taking stock of the country’s economic situation, but he has also been particular to attend every opportune international event to exchange notes with Pakistan’s international development partners, with a strong emphasis on building a rapport with the so-called World Bank System. Equally important, he is taking great pains to get to know business leaders at home and share his view of the challenges facing the economy as well as his vision for a way forward. Speaking of the “execution mode” at a business summit was his way of sending a clear signal to the markets that the government is all set to go beyond firefighting and push through the painful economic reform measures once and for all to put the economy on an even keel. While this determination may not exactly spell music to the ears of the common Pakistanis, who have been paying through the nose the price of Pakistan’s bad economic showing and who must inevitably foot the bill of the putative reform, there is little doubt that that is the way to go for Pakistan. That, however, is no guarantee of smooth going ahead.

Take the instance of Pakistan’s recent bonhomie with Iran, which drew a quick rebuke from Washington. Overland trade is not exactly something Pakistan and Iran invented yesterday. In fact, Pakistan is probably the only country in the world with negligible volumes of overland trade with its neighbours. While the reasons for this are well known, nothing warrants sticking to the old paradigm to the detriment of the populace. On the other hand, Pakistan’s geostrategic imperatives remain unchanged. In fact, the finance minister’s assertion that there is no alternative (plan B) to an IMF package is an admission of the bitter fact that Islamabad is as dependent on the whims of Washington to stay afloat as it ever was. Aurangzeb is optimistic about an IMF mission arriving in mid-May to negotiate a staff-level-agreement (SLA) over a longer-term IMF programme, but the Fund’s executive board is yet to accord its approval to the final review of the Stand-By Agreement about to sunset. It remains to be seen how PM Sharif’s government sells the IMF and Washington closer economic ties with Iran.

Taxing the untaxed and undertaxed is another major stumbling block the government must negotiate before it can make any meaningful progress on economic reform. While the task is simple enough on paper, rolling it out in practice promises to be anything but simple. Just as difficult will be the challenge of offloading the cash-guzzling state-owned enterprises (SOEs). Vested interests entrenched deep in these organizations are not about to let go of their perks and privileges easily. Then there is the beleaguered energy sector, reforming which promises to be both expensive and arduous. The enormity of Pakistan’s economic challenges is magnified by a shifty political landscape in which a major political force has one foot in the system and one outside it, intent on rocking the boat by any means necessary.

To his credit, the finance minister has taken a no-nonsense approach to Pakistan’s economic challenges and his approach is quite pragmatic. He must realize that more or less half of the over $10 billion forex reserves he is projecting by end-June are based on safe deposits by friendly countries – not exactly funds available for the government to dispose of as it pleases. He must know that the IMF team is arriving in Pakistan with the annual budget just around the corner, and the Fund’s negotiations will be based on hard budget numbers and clear-cut policy measures. The country mission may feel justified in pressing for steeper reform goals and stiffer conditionalities because of the longer duration of the Extended Fund Facility (EFF) Pakistan is seeking. Negotiating all those challenges is not going to be a cakewalk. It helps that the government is embarking on parallel economic diplomacy initiatives under the aegis of the Special Investment Facilitation Council (SIFC), which have shown some promise. All agencies of the government and all organs of the state must join hands in a Herculean effort to turn the country around. Navigating these waters amid a low-growth, high-inflation economy and an array of geostrategic challenges has fallen to the lot of the incumbent government and Finance Minister Aurangzeb. Here’s hoping they turn out to be equal to the challenge.