On the Road to Recovery


On Jan. 13, 2022, the National Assembly passed the Finance (Supplementary) Bill 2021 — generally known as the ‘mini-budget’ — amidst scenes reminiscent of a Pakistani street brawl. The importance of the bill could not be underestimated as it was a prerequisite for bringing the 22nd IMF programme back on track. Failure to pass the bill would have led to the derailment of the IMF programme with consequential damages that could have plunged the economy into a deep abyss. The treasury benches hailed it as a victory of the ongoing reform programme to turnaround a bankrupt economy, while the opposition benches declared it as a surrender and the darkest day in the history of Pakistan. The vote reflected the sharp political polarization in the country, which is now generating enormous economic uncertainty at the expense of the people.

In the power politics of the country, the opposition argues that the government is responsible for bankrupting the country in its three and a half years in office, and hence it needs to be replaced immediately to save Pakistan from further damage. The opposition has pinned all hopes on painting the PTI government as incompetent and convincing the distressed people that it should be removed through long marches and enticing the government’s supporters to switch sides in the parliament to trigger its collapse. Notwithstanding the economic chaos such shenanigans would generate, the opposition claims that it has better economic managers at its disposal and would negotiate a better deal with the IMF.

This is not the first IMF programme in the history of Pakistan.  In fact, we are the most frequent users of the IMF services in the world. The tragicomedy of the political economy of Pakistan is that the most vocal and vociferous condemnation of the IMF programme in the parliamentary debate come from leaders of the two parties, which subjected Pakistan to the most numerous IMF programmes in recent history; the PPP has done the honours six times, and the PML-N has the distinction of doing four agreements, with the latest one in 2016. The various IMF article IV consultation reports are a documented history of all the actions that were agreed by respective governments over the years but were never implemented. The genesis of the current programme also lies in the failure of the 2016 programme.

Pic 1 | ThinkTank from Narratives Magazine
Contrary to popular perception, much of Pakistan’s external liabilities were accumulated under the PPP and PML-N administrations.

For the record, it is instructive to note that within a few months after the ending of the last programme in September 2016, the IMF was sounding the alarm bells and cautioning the government to take actions to stop the rapid deterioration in critical economic indicators. These warnings were clearly reflected in the July 2017, Article IV, IMF consultation report that inter-alia included the following critical observations:

  1. Exhorted the PML-N government to safeguard the macroeconomic gains of the completed programme through continued implementation of sound policies, and to continue with structural reforms to achieve higher and more inclusive growth.
  2. Warned that foreign exchange reserves have declined since the end of the EFF-supported programme and remain below comfortable levels.
  3. Cautioned that on the structural front, progress in electricity sector reforms has been mixed, with a renewed build-up in circular debt.
  4. Pointed out that massive financial losses of ailing public sector enterprises (PSEs) have continued.
  5. Highlighted that private investment and exports remain low to support higher private sector led growth and catalyze needed job creation.
  6. Cautioned that lower-than-expected export growth or remittances over the medium-term could increase risks associated with rising repayment obligations and profit repatriation from the energy investment and other CPEC-related projects
  7. Warned that greater exchange rate flexibility was needed to rebuild external buffers, which were below adequate levels, and strengthen Pakistan’s competitiveness, which had been affected by real effective exchange appreciation.
  8. Advised that maintaining fiscal discipline, limiting government borrowing from the SBP and ensuring its full operational independence will be important pre-conditions that need to be in place for effectively controlling inflation.

The PML-N government in 2017 was in no mood to listen to any sane advice and freed from the discipline of an IMF programme went on a spending and borrowing binge in preparation of the next elections.

By the time the new PTI government was inducted in August 2018, Pakistan’s external debt had accumulated to over $85 billion, needing a recurring external debt servicing of over 12 billion dollars a year accompanied with an annual current account deficit of over 19 billion dollars in combination representing a gross financing gap of over 30 billion dollars a year. With only 8.0 billion dollars in the foreign currency reserves, and no financing arrangements in place, the country was facing an imminent default. Pakistan was losing reserves at the rate of 100 million dollars a day and would have run out of reserves in a matter of a few weeks unless credible new financing arrangements were not established.

Pic 2 edited | ThinkTank from Narratives Magazine
Rising foreign remittances have buoyed Pakistan’s economy over the last two years.

Thus, the new government at its inception inherited from the PML-N, a full blown balance of payment crisis embedded in a classic external debt trap wherein it had to borrow more in foreign currency to not only repay the loan installments, but also had to borrow more to pay the interest incurred on those loans.

This meant that Pakistan’s external debt would continue to increase due to legacy of the previous stock, draining needed resources away from investment in the economy. This would happen when the new government would be undertaking painful economic reforms to transform the fossilized systems of an import dependent bankrupt economy. A transformation that would eventually create a sustainable export-led economy, but in the interim put enormous burden on the people in the shape of devaluation, supply side disruptions, inflation, tax increases and austerity. The new government from its inception would have to pay a high political cost for the sins of the previous governments.

In the 42 months since the advent of the PTI government, it has faced and effectively managed three unprecedented mega crisis:

  • Pakistan’s worst balance of payment crisis that it inherited in 2018. 
  • The outbreak of ‘once in a hundred year pandemic’ in the early 2020.
  • Since August 2021, massive price surges in global energy and commodity markets due to disruptions in production and logistics supply chain caused by the pandemic.  

Multiple crises one after the another have truly tested the mettle of the new government. It has gone about tackling the emanating challenges unfazed with grit and determination. In spite of the heavy odds and extremely vicious opposition narrative, it has successfully staved off bankruptcy.  This involved timely arranging 10 billion dollars of foreign currency financing from friendly countries and signing an IMF programme that unlocked 38 billion dollars financial inflows over the three-year period. These two critical financing actions enabled Pakistan to avoid defaulting on its obligations. As a precursor to concluding an IMF agreement, unpopular policies of implementing a market-based exchange rate system, keeping real interest rates mildly positive and adjusting electricity prices to reflect the full cost of delivery of power were initiated early on. The current account deficit which sparked the balance of payment crisis in 2018 came down sharply and by middle 2020 had turned into a surplus.

Pic 3 edited | ThinkTank from Narratives Magazine
The PTI government is credited with bringing Pakistan’s current account into surplus, unlike its predecessors.

The pundits were predicting the value of the dollar to cross Rs.200 by year end 2018, but this has not happened. Instead, the government has been able to stabilize the economy and weathered the onslaught of 10-13 percent yearly inflation albeit igniting popular discontent. However, the government managed to keep the headline inflation well below Pakistan’s highest yearly inflation rate of 20 percent witnessed during the PPP regime in 2010. All efforts were made to prevent the full impact of international prices percolating into domestic food prices. To protect the most vulnerable the government funded the biggest expansion in the social safety net Ehsaas Programme, it focused on supporting and enhancing the eco-system for promoting employment and entrepreneurial opportunities for the low-income groups under Kamyaab Pakistan programme, implemented a free health insurance scheme for all families and provided targeted subsidies for provision of food rations to the poor, all designed to cushion some of the inflationary impact.

Managing the corona pandemic has been outstanding. While the rest of the world was resorting to massive lockdowns and bringing economic activity to a standstill, the Prime Minister insisted from the start that the economy will not be allowed to shut down as its impact on the poor segments of the society would be devastating. The multiple initiatives comprising the State Bank of Pakistan’s special financing to keep the production supply chains functional, disbursement of Rs.1.2 trillion targeted financial support for the vulnerable, creating a system for organized pandemic monitoring and coordinated vaccination coupled with smart lockdowns proved to be highly successful. Neither our health systems got overwhelmed nor our economy suffered massive disruptions. In addition, focused strategies to enhance sectoral productivity and investments, including job creating development budgetary allocations helped create stability and normality.

Leading world bodies acknowledge that we were amongst the top countries which achieved total economic normalcy following the breakout of the virus. The GDP growth that declined by 1.0 percent in 2019-20, has bounced back in 2020-21, registering a healthy recovery in agriculture, manufacturing and services combining to yield a respectable overall 5.5 percent GDP growth. Agriculture growth of 3.5 percent, Industrial growth of 7.8 percent and services growth of 5.7 percent is heartening and bodes well for the future.

It is evident that Pakistan is slowly but surely moving out of the economic quagmire of the last few years and is now well positioned for making big strides in its quest for rapid and sustainable economic growth. There are at least 10 indicators that support this optimism.

  1. With the parliamentary endorsement of the IMF conditions, economic uncertainty regarding our debt refinancing and access to the international capital markets has been considerably reduced which is an important factor for improving the overall investment climate in the country.
  2. All sectors of the economy including agriculture, manufacturing and services are buoyant.
  3. The IT startups for the first time are attracting noticeable foreign investment.
  4. Our corporate sector is cash rich and in FY 20-21 has shown all time high production, sales and profits.
  5. Exports are increasing at a rapid pace and have exceeded all previous levels.
  6. Foreign remittances continue to grow and have crossed the $30 billion a year milestone.
  7. Demand for private sector credit is strong and fresh financing has crossed the trillion-rupee mark.
  8. Banks balance sheets are strong and are flush with liquidity.
  9. Investment under the CPEC is transitioning towards business to business ventures and is expected to ignite foreign direct investment that may exceed all the previous records.
  10. The leadership of the country is single-mindedly focused on geo-economics and is willing to pay the political costs of taking tough economic decisions and undertaking governance reforms that have been left unattended in the past.

While light at the end of the tunnel is clearly visible with economic deterioration having been reversed and economic incentives correctly realigned, the government is fully cognizant of the need to quickly generate sustainable export-led growth of 7.0 to 8.0 percent a year to enable Pakistan to come out of the external debt trap, and create job opportunities for our enormous youth bulge. To achieve this objective, long neglected structural reforms have to be effectively implemented. Prime Minister Imran Khan is personally monitoring progress of around a dozen economic transformation initiatives to correct the deep-rooted institutional and sectorial challenges that negatively affect public and private investment, national productivity and competitiveness of the economy. These initiatives are critical but extremely challenging as they are up against entrenched bureaucratic controls, archaic processes, obsolete skill sets, risk aversion, fear of the NAB and general resistance to change. Successful implementation will determine whether Pakistan will be able to go into the desired higher growth trajectory.

Pic 4 edited | ThinkTank from Narratives Magazine
Pakistan’s growth forecasts are steadily improving under the PTI’s stewardship.

Notable major initiatives in various phases of implementation include reforming the energy sector to overcome legacy issues and create a system that provides competitively affordable and reliable energy for all, with independence from imported fuels. Also, fixing the FBR to make it a tech savvy, professional and investment friendly entity that provides the needed tax revenues transparently, equitably with ease of compliance and avoidance of taxpayer harassment, and a revamped Privatization Commission has been tasked to accelerate the privatization of state-owned enterprises and stop the profuse financial bleeding they impose on the federal budget.

The various sectoral ministries are implementing plans, including  transforming agriculture into a modern profitable globally competitive economic sector, deregulating manufacturing sector and eliminating  the ‘NOC Raj,’ which is crippling our productive sectors, facilitating development of the private sector and removing the constraints on the development of the small and medium enterprises. To boost the knowledge economy, a special technology park authority has been created and tasked with attracting investment to put Pakistan on the global map of information and computer technology with emphasis on enhancing national artificial intelligence capability.

In the trade area, Pakistan is rapidly completing the building blocks for becoming a regional trade hub by connecting Central Asia, Western China and Afghanistan to our ports on the Arabian Sea. Trade liberalization, FTAs and framework agreements for investments are being put in place for efficient and smooth transactions. At the provincial level in Punjab, a spatial strategy approved by the cabinet is being implemented to create international competitive advantage for Punjab through divisional and district development plans dovetailed with master planning in each Division, District and City of Punjab. These plans realign development expenditures and PPP arrangements specifically for each area to strengthen their various value chains in agriculture, manufacturing and services sector. The focus of master planning is to turn our cities into engines of growth by transforming them into internationally competitive cities.

Pic 5 edited | ThinkTank from Narratives Magazine
The opposition’s reckless protests threaten to derail Pakistan’s hard-won economic stability.

The banking sector under the leadership of the State Bank of Pakistan is opening up inclusive financing in new areas such as mortgage finance, agriculture finance and SME finance. The State Bank of Pakistan’s Roshan Digital Accounts are facilitating investment by overseas Pakistanis in a big way. The FDI is expected to jump manifold due to launch of phase-II of the CPEC; Chinese corporate sector investment is expected to boom. The board of Investment has been tasked to populate SEZs at a rapid pace. All impediments in the way of the FDI are being proactively reduced.

By the grace of God, Pakistan is now on the road to recovery and growth. The issuance of a global Sukuk Bonds within days of the revival of the IMF programme was well received in the international markets. Heavily oversubscribed, it is already trading at a premium. This indicates the confidence of the international financial markets in the emerging story of Pakistan; its potential and the commitment of its leadership to reform. Barring another black swan event or further escalation of global oil prices, Pakistan’s best days are here to stay. The beginnings of the long-awaited investment surge is taking shape, the stock market is poised to see the return of the foreign portfolio investor, successful completion of a few large ticket privatization transactions will catalyze direct foreign investment towards new highs. For the first time in 40 years we are enjoying relative peace on the borders and peace within. If we are able to persistently build on this momentum, the sixth largest and most youthful country in the world can rapidly progress on the road of development, lift its masses out of poverty and enable it to join the ranks of the prosperous.

Dr. Salman Shah | ThinkTank from Narratives Magazine
Dr. Salman Shah
The writer is a former Finance Minister and founder of Bridge-Asia Financial Services. Currently, he serves as an advisor to the Chief Minister of Punjab on Economic Affairs and Planning & Development.

Dr. Salman Shah
Dr. Salman Shahhttp://narratives.com.pk
The writer is a former Finance Minister and founder of Bridge-Asia Financial Services.


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