After a few weeks of wait and see, the government has recently taken some decisive steps. The increase in natural gas prices, announced on September 17, was followed up by a mini-budget presented in the National Assembly the next day. Both steps signal a departure from the ideology the ruling Pakistan Tehreek-e-Insaf (PTI) expressed in its election campaign — and before that, in its long sit-in protests in 2014.

The increase in gas prices is aimed at correcting an almost criminal underpricing of a natural resource that has already depleted in Pakistan’s gas fields. The mini-budget is, similarly, an attempt at rationalising both the government’s income and expenditure.

Retaining many of the previous budget’s tax cuts for the less affluent, the government has increased tax rates for the rich. It has also announced programmes for housing and medical care for the poor apart from offering special incentives to exporters. The mini-budget has simultaneously taken a bold step by slashing development spending to bring fiscal deficit – the gap between the government’s earning and expenditure – under control. It has also promised to raise revenue by stopping tax evasion and plugging leakages in the tax collection machinery. Though, it has made a major concession by allowing non-filers of tax returns to purchase cars and properties, and by not banning luxury imports.

This middle-of-the-road strategy is not what many expected from a PTI administration. But campaign promises about what should be done and having the power to decide what must be done are two separate things.

What still has not been addressed is the balance of payment deficit – the gap between the US dollars coming into Pakistan and the US dollars going out of the country – and also inflation. Unless taken care of, these two problems will remain front and centre in our economic woes.

The statement by finance minister Asad Umer that the mini-budget is just about emergency steps to stabilise the economy – and that actual reforms will be announced soon – has not dispelled the sense of uncertainty about what the government intends to do. While many people applaud PTI’s social welfare agenda and its insistence on imposing austerity on the elite, there is uncertainty about interest rates and whether the rupee will further depreciate. There are also worries about the need for dollar loans to shore up foreign exchange reserves held by the State Bank of Pakistan.

The government, indeed, is caught up in the middle of some deceptive choices: should it manage the deficit in the balance of payments or should it provide relief to people; should it go to the International Monetary Fund (IMF) for assistance or should it seek financial help from China in order to avoid the IMF; should it initiate disruptive reforms or should it embark on a slower process of change that accommodates the existing sociopolitical realities.

As far as the debate about IMF is concerned, the narrative is simple. In the past, Pakistan has been dependent on IMF (and by association, on the United States) for regular assistance to stabilise its economy. This dependence is assessed to have given the United States a leverage over our foreign policy, specifically in Afghanistan. Now that China has emerged as a counterweight to the United States, the argument goes, Pakistan should move away from the IMF.

There are news reports that claim China has already stepped in to provide Pakistan with much-needed foreign exchange. These reports also point to how the China-Pakistan Economic Corridor (CPEC) has provided a much-needed momentum to Pakistan’s economic growth.

People outside the government, however, are still looking for clarity on how exactly China will help Pakistan’s economy and what specific steps it can take to resolve the current uncertainty. Some have even predicted that China will disclose its economic plan for Pakistan only after our government has rejected the option to go to the IMF.

This is an ill-informed viewpoint. Pakistan does not face a choice between either IMF or China. One must realise that China is the third-largest contributor to IMF and is increasingly viewed as a champion of the existing global economic and financial system, especially after the United States has started trade wars with many countries. What bolsters this perception is that, unlike the Trump administration, President Xi Jinping has shown his commitment to multilateral organisations like the IMF.

The next point to note: there is no alternative to the IMF. While the creation of the Asian Infrastructure Investment Bank (AIIB) has been spearheaded by China and it is headquartered in Beijing, it is not a substitute to the IMF. Its mandate is to provide infrastructure loans to developing countries. It does not have the expertise (or the mandate) to assist countries facing problems in overcoming their fiscal deficit and in meeting their balance of payment requirements.

That Pakistan’s economy is mismanaged on both counts is starkly evident from the fact that it is among the top five countries that have repeatedly used an IMF assistance to overcome these problems. Overly dependent on imports but unable to export enough to pay for these imports, our economy is not in a sustainable situation. In order to rectify this state of affairs, IMF will require firm commitments – not just vague promises – from Pakistan to reform its economy.

But, as we have witnessed repeatedly, governments in Pakistan adopt a straight and narrow path for a while but, once the crisis has been averted, they return to their old habits, letting the external deficit rise again. Before long, the country is headed towards IMF one more time.

Market participants, who have lived through previous balance of payments problems in Pakistan, are by now conditioned to IMF bailouts and the sense of calm these bailouts create in the market. Since an IMF assistance package is premised on improving the macroeconomic outlook over the three years after its initiation, it gives market players a hard handle to anchor their expectations.

The question then is: what can China offer (as an alternative to an IMF programme) that will have the same calming effect on Pakistan’s market?

This brings us to another fundamental issue. Policies to narrow the twin deficits – the balance of payment deficit and the budget deficit – are not easy to implement because they require a change in economic behaviour which does not suit the status quo. Barring a revolution that seeks to overthrow the entire system of government, any attempt to take on the prevalent economic interests will always face resistance. Past reform programmes were initiated – but half-heartedly implemented – only because Pakistan was facing a balance of payment crisis and the protectors of the status quo realised that normal economic activity would not be possible without IMF’s assistance.

If the IMF option is rejected, the question to ask is why China will indefinitely finance Pakistan’s external deficit. Instead, China is highly likely to choose a combination of providing soft loans, forcing Pakistan to narrow its twin deficits and, most importantly, urging Pakistan’s policymakers to implement hard reforms. Only the latter will make Pakistan’s economy robust enough to participate in the CPEC as an active partner, rather than as a silent one.

Should we expect China to set economic targets for Pakistan without IMF’s involvement? Even if it does set these targets, will that not provoke public anger over how our best friend is treating us? This simply does not work.

The elements representing the status quo in Pakistan will prefer that China simply fund our external deficit without interfering too much in the economy (the way IMF does). These elements will argue that Pakistan’s needs are small in the larger context of what China seeks to achieve globally; so China should view this economic lifeline as a small price to pay for Pakistan’s loyalty.

This expectation is flawed for a very simple reason: after the anti-corruption campaign that President Xi Jinping has forcefully implemented at home, it is impossible that China will pander to Pakistan’s economic elite. China is also known as a tough bargainer. If its takeover of a Sri Lankan port in Hambantota in return for unpaid loans is any guide, China does not offer concessions on a platter but only when it really has to. A final complication in shifting towards China is the IMF’s seal of approval, which basically means that a country remains a viable destination for foreign investment only if IMF is satisfied with its macroeconomy. If IMF is taken out of the picture (after, say, Parliament rejects a recourse to it), managers of foreign funds that have invested in Pakistan’s stock market may become jittery. A poorly managed break from IMF may accelerate the outflow of their investment — something that has been happening already since mid-2016. With foreign investment in the stock market estimated at six to seven billion US dollars, heavier outflows may trigger a foreign exchange crisis.

To sum it up, IMF is too integral to Pakistan’s business sentiments, especially during this period of economic uncertainty; the China option, on the other hand, is too untested and politically fraught to provide a viable, realistic alternative.

Whether to narrow the external deficit or provide relief to the people — it is a tough call to make for a newly elected government. The decision to cut retail oil prices on September 1 is good for the average Pakistani and will help defuse inflation but there is a catch here: coming after a record balance of payment deficit in July 2018, this reduction casts doubt on whether the government is serious about bridging that deficit. Reducing retail oil prices after the oil import bill increased from 10.6 billion US dollars to 13.3 billion US dollars in the financial year 2017-18 will not be well received by foreign fund managers. They are already edgy as Argentina and Turkey are experiencing currency crises and there are fears about Indonesia, Malaysia, India, Brazil and South Africa as well.

Relief for the poor at this point in time is not the right signal. The nature of a drip-drip depletion of foreign exchange is such that it may become difficult to manage, unless the balance of payment deficit is significantly lower in the next several months compared to July 2018.

The caution with which the government is moving forward is understandable. It has inherited an economy on the brink and emergency measures (taken recently) will have to be supplemented by tough economic reforms. Such reforms can be driven from the top with limited consultation (that is, they can be disruptive) or they can be launched after discussions with all the stakeholders (that is, they can be accommodative).

This decision needs to be made wisely. For example, a parliamentary debate about whether Pakistan should approach IMF makes sense but, if the level of discussion is not nuanced enough to really understand the alternative (that is, a total dependency on China), the resulting decision will be ill-informed.

It is, in fact, easy to predict the outcome of a parliamentary discussion: an elected representative will not accept an economic roadmap devised by IMF, a foreign institution that is viewed as doing the bidding of a foreign power. Even from a personal point of view, an elected representative will not agree on tough fiscal steps which restrict his/her power to reward his/her political constituency.

Furthermore, Pakistan’s bureaucracy is tainted by association as it has facilitated corruption by the political leadership. Since it takes decades for a bureaucrat to reach the summit of the bureaucracy’s rigid hierarchy, he or she does not risk antagonising political bosses lest he or she is pushed down the career ladder. The bureaucracy, therefore, will protect its interests with the same zeal as the politicians do. To bring about real economic change, it is important to overcome such institutional inertia.

In this scenario, a strong case can be made for disruptive reforms from the top.

When confronted by a government machinery steeped in nepotism and corruption, it may not be possible to include everyone in policymaking. More so when a large section of those who wield political power are allegedly corrupt or at least condone corruption. The ruling PTI won the election on an anti-corruption agenda but its hesitant first steps and a business as usual approach to governing may extinguish public goodwill for it.

To stabilise the economy, the government should approach IMF for a bailout package — and it should do so quickly. Pakistan’s top leadership should also visit Beijing, not just to share its vision for economic and social reforms but also to shore up support in China for CPEC and the China-Pakistan Free Trade Agreement. It is not either China or IMF but a bit of both that Pakistan needs.

In terms of providing relief to people, short-term measures will only backfire. It will be wiser to inform people about the true state of Pakistan’s economy and ask them to be prepared for hardship in the short and medium run in exchange for a more prosperous future. Hard policy steps will be positively received as they signal that things are on the mend. If the government takes the right steps and justifies them, this in itself will create a virtuous cycle whereby investors (and people at large) will start planning for the future.

A real battle will have to be waged against the beneficiaries of the status quo. Since they have engineered or facilitated the weakening of state institutions, they will resist any attempts to reform the economic structure of the country — although they will do this by hiding behind nationalistic slogans or political expediency. In effect, accommodative economic reforms may only result in compromises such as the recent concession to non-filers of tax returns.

If the government’s political mandate is to clean up the system, it will be well-advised to initiate disruptive reforms.

The writer is the founder and author of 'Doctored Papers', a financial advisory.

This article was originally published in the Herald's October 2018 issue. To read more subscribe to the Herald in print.