Rarely have I seen a ruler so oblivious to the tsunami heading his way. While Pakistan Prime Minister Imran Khan is busy preaching family values to the country on a daily basis, the spiral of inflation that is heading in its direction once the combined impact of the petrol and power price hikes work their way through the system will set off a chain of consequences that even the most devoted “spin masters” would struggle to contain. And that is just the beginning.
There is no telling how the talks with the International Monetary Fund are going but it is easy enough to see that they are not progressing smoothly. Whether they eke out an agreement in Washington, DC, or return with nothing more than a commitment to keep talking (like they did in June), the days to come will have to see further hikes in petrol and power prices, more taxes, further depreciation of the exchange rate and hikes in interest rates. The market is already pricing all this in. The only question is how far will it all go.
Financial markets
Consider what is happening in the financial markets. Last Friday, Pakistan’s former finance minister Shaukat Tarin told us that the talks with the Fund are largely over and they are simply “validating the numbers” on some new data that had been provided, that a joint statement should be released “in a few days” announcing the successful resumption of the programme.
Since Monday, the exchange rate plunged by two and half Pakistani rupees in the interbank market, and around three Pakistani rupees in the open market (depending on the city). On Wednesday, as of writing this, the rupee had touched 174 in interbank trades according to a few insiders, with little to no sign that the volatility was about to end.
The situation is similar with interest rates. In a government debt auction held on Wednesday, the results of which had not been uploaded as this piece was being submitted, most bids clustered around the three-month tenors and yields demanded were sharply higher.
The auction aimed to raise 600 billion Pakistani rupees and fetched bids for 715 billion Pakistani rupees, leaving little room to be selective. Almost half the bids were in three-month tenors, and only six of those bids were offered at yields at or below the cut-off yield for three-month paper in the last auction held on October 6. The remaining 95 bids were all higher.
The cut-off yields, once they are announced, will tell us more, but one thing is certain. The market is back to demanding higher yields from government paper just like it was doing in the months from February to March or April. Back then, it was told forcibly that no rate hikes were happening regardless of what happened on the inflation front, and the market settled down. But that moment lasted a few months only.
The current account deficit shot up from May onwards, and with inflation joining the ranks by shooting up as well in the months to come the State Bank of Pakistan would have little option but to comply with markets’ demands, especially if it wants to stay in a Fund programme.
The market knows something that the government and its corps of spinners cannot swat away. It knows the party is ending and soon prices will have to reflect reality. The first prices to start adjusting to the new reality are energy and the price of money (reflected in the exchange rate and interest rates). In the months to come this adjustment will ripple through the rest of the economy, showing up in food and other essential items.
Is Pakistan prepared?
Is Imran Khan prepared to face this reality that has already begun arriving on his shores? The one thing any ruler faced with such a situation should do is reach out to as many political parties as possible and build an agreement on the set of measures that will be necessary to tackle the situation.
When faced with challenging times, rulers need bridges – as many of them as possible. The next thing would be to start preparing the public through a concerted messaging campaign. And the third would be to put in place as much by way of safety nets as possible to save the most vulnerable from the ravages of what is coming.
How much of this is happening? In fact, how focused is Imran Khan on the challenges coming his way? Instead of building bridges, he has damaged the one bridge that was crucial to his power – the one with the security establishment, the reason he could go on about being on “the same page” with the very props to his rule.
His relationship with the opposition was always a combative one. And his relationship with his allies in government is functional, at best, though it is worthwhile to keep an eye on the fate of Jam Kamal’s chief ministership, lest that sort of thing spread beyond Balochistan.
Is there effective messaging happening? No, all we are seeing is individual ministers trying to save their own skins while PM Khan appears preoccupied with swatting away the swirling talk that he makes decisions through recourse to “magic”.
When faced with questions about people’s growing difficulties in the face of price hikes, all we hear are defensive arguments that “this is global” or promises of subsidies. One particularly committed gentleman loudly proclaimed that the people are willing to bear petrol at 200 Pakistani rupees in their love for Imran Khan!
The gap between what a ruler says and what the people are going through cannot increase beyond a certain point. When that point comes can be different from one country to the next, depending on various things. It would be a terrible mistake for the Pakistan prime minister and his acolytes to underestimate the strength of the wave that is about to hit them in the months that come. Being prepared will be critical to survival.
This article first appeared in Dawn.
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