Erosion of the Rupee

Market uncertainty is increasingly being cited as the major reason for the erosion of the rupee, the decline in foreign direct investment during the past four months, the decline in investor confidence and the plunge in the country's stock markets. And this uncertainty is the outcome of the sustained failure of the PTI administration to present a set of economic policies required to provide a comfort level to economic players in the country.

To date, the government has not eased concerns about whether it would seek an International Monetary Fund (IMF) programme with all its associated policies in the form of pre-programme as well as during the programme conditions; or whether it has definitively decided to go it alone which implies a set of policies targeted to dealing with the existing economic impasse that would almost certainly require the implementation of several politically challenging policy decisions that may not markedly differ from what the IMF would have recommended but without the bailout package that may have allowed the government to negotiate a slowdown in the reform process.

As matters stand today, the policies announced by the PTI government are disturbingly similar to what were in effect during the previous administration. The supplementary budget of the incumbent government sought to decrease development expenditure and raise current expenditure with obvious negative implications on growth. The budget did not take advantage of the fact that the civilian and military leadership are on the same page for the first time since 2008 or of the need to negotiate a freeze on the income of the civil service for the duration of the current crisis. Additionally, revenue is to be generated from existing taxes, from those who are filers rather than from the non-filers and sadly, there have been no major developments in reforming the tax structure to make it fair and non-anomalous though the public has been informed that an exercise to that effect is ongoing.

The export package has been carried over from the Abbasi-led government as have the subsidies on tube-wells and fertilizers. Sugar exports would be provided a subsidy given that costs of production in the domestic market are higher than in the international market - a decision that may lead to continued rising area under sugarcane cultivation as opposed to cotton which, in turn, accounts for high imports of raw cotton to meet domestic demand. And unfortunately, claiming foreign direct investment is flowing into the economy in the aftermath of a change in government without taking into account agreements and request for incentives by existing investors that predate the installation of the Khan administration.

The question of whether the State Bank of Pakistan is to be allowed autonomy to meet its stated terms of reference notably to reduce inflation through an independent monetary policy and allow the currency rate to be set by market conditions was recently publicly compromised (though SBP has never enjoyed meaningful autonomy in the past irrespective of claims to the contrary by previous administrations). Additionally, government after government has used SBP not as the lender of the last resort but of the first resort (a policy that an autonomous SBP would not have supported) with the Khan administration already borrowing nearly 2.8 trillion rupees this year (as opposed to 1.8 trillion rupees in the comparable period last year). There needs to be some legislation on how much the government should be allowed to borrow from SBP.

Imran Khan has assured the public he would not take decisions that would hurt the poor, insists he would raise employment opportunities and provide housing to the poor, and take measures that would be pro-poor and pro-economic growth. These are salutary objectives; however, he must understand that taxing the already taxed is not the way forward. He must ponder whether or not all those who receive government largesse - be they the civil servants or be they industrialists to be able to compete abroad, or be they rich farmers who the constitution allows not to be taxed by the federal government - paying taxes justly and righteously.

To conclude, Imran Khan is relying on his considerable popularity to defer decisions that are fuelling uncertainty. He would do well to look at what is happening in France to the considerable popularity of President Emanuel Macron after he raised fuel taxes even though over 57 percent of all French government revenue is directed into public service. Public patience even that of one's supporters is likely to dissolve once their disposable incomes shrink.