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The World Economic Outlook, a global survey of key macroeconomic indicators of member countries uploaded on the International Monetary Fund's (IMF's) website, has made some dire prognosis with respect to Pakistan's economy: (i) growth rate would decline by 1.8 percent in the current fiscal year - from 5.8 percent in 2017-18 to 4 percent in 2018-19; (ii) inflation would almost double - from 3.9 percent last fiscal year to 7.5 percent in the current year; (iii) overall fiscal deficit would deteriorate from 6.5 percent last year to 6.9 percent in the current year; (iv) bilateral and multilateral financing has supported exchange reserve buffers; and (v) Pakistan and war-torn Iraq suffer from low levels of business creation with one business per 5000 and 1000, respectively. However, the Fund projected a slight improvement in the current account balance - from negative 5.9 percent last fiscal year to negative 5.3 percent in the current year.

The two relevant questions are: What external factors have been taken into account while making these projections? And can the dire prognosis by the IMF be sourced to political decisions made by the previous administration or be laid at the doorstep of the incumbent government? World trade continues to be subjected to considerable turmoil due to US President Trump's 'nationalist' policy to levy prohibitively high tariffs on countries with a trade surplus with the US, with French President Emmanuel Macron defining nationalism as unpatriotic during the recently concluded Armistice celebrations - a comment that prompted the former to tweet, "the problem is that Emmanuel suffers from a very low Approval Rating in France, 26 percent, and an unemployment rate of almost 10 percent. He was just trying to get onto another subject. By the way, there is no country more Nationalist than France, very proud people-and rightfully so!"

Economists are also predicting a market collapse in the US with Paul Tudor Jones, founder of the Tudor Group, stating that while "we have the strongest economy in 40 years ... it is unsustainable"; former budget director for the Reagan White House, David Stockman concurred and declared that an economic collapse is imminent; and Scott Minerd, Chairman of Investments and Global Chief Investment Officer of Guggenheim Partners, warned that "the markets are potentially on a collision course for disaster ... once we reach a peak we'll probably see a 40 percent retracement in equities." In its report, the IMF notes that "appreciation of the US dollar and higher interest rates in the US could reinforce capital outflow pressures, which, coupled with higher oil import bills would put additional strain on reserves" for countries like Pakistan with considerable external financing needs.

Two projections of the IMF have not yet materialized. First, the decision of the US to re-impose sanctions on Iran but grant exemptions to eight of the largest Iranian oil purchasing countries, has led to a reduction in the international oil price, contrary to what was projected in the IMF report. Additionally, Pakistan has been granted a buffer against an international oil price rise after Saudi Arabia decided to extend a 3 billion dollar deferred oil payment facility to Pakistan for three years. However, the dollar has strengthened vis-a-vis the rupee, subsequent to an inability to intervene in the market to shore up the rupee value as the PML-N's unsustainable policy to borrow to shore up reserves was abandoned, implying a massive rise in Pakistan's external debt. And secondly, Pakistan Muslim League-Nawaz (PML-N) administration, after the completion of the IMF Extended Fund Facility (September 2013 to September 2016), witnessed a drying up of bilateral and multilateral lending and began to rely on borrowing from the external commercial banking sector that led to net outflows rather than net inflows since late last year. In other words, the current economic impasse can be sourced to the flawed policies of the previous administration though one must acknowledge that to date, less than three months in government, the Khan administration has done little to generate 'political certainty' that in turn gives birth to a comfort level for investors - both foreign governments and private sector.

To conclude, both external and internal factors (the latter mainly attributable to the previous government) account for the majority of the economic issues facing the country today. The incumbent government's delay in formulating and announcing a reform agenda is simply exacerbating the problem. The luxury of time unfortunately is not available to the Khan administration but neither was it available to the previous two administrations given that they both went on the IMF programme within a few months of taking over power (as is expected of the current government). However, the present administration's inheritance is more disconcerting as it faces an unsustainable current account deficit, coupled with considerable repayments due on loans procured from the external commercial banking sector at high rates of return and very short amortization period.

Copyright Business Recorder, 2018

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