I give up! In all fairness I can no longer blame the Federal Finance Minister Ishaq Dar for his flawed economic policies that have finally come home to roost two and a half years after the PML-N government took over the reins of administration. Blame must now devolve on the man who appointed him and who continues to praise him at every fora - domestic as well as international: the thrice elected Prime Minister Nawaz Sharif.
Ishaq Dar routinely praises the economic policies that he supports, trashes those that were being followed during the tenure of the PPP-led coalition government and to prove the veracity of his claims cites a few positive reports that appeared in the Western media that focus on improved rating by international rating agencies as well as the rising foreign exchange reserves as an outcome of his accomplishments. The Ministry of Information, directly or through the state-controlled media agencies, disseminates these claims/reports to the private media outlets - electronic as well as print. What has been ignored to date is the fact that these few favourable reports were premised on the capacity of the country to meet its debt obligations, payment of interest as well as the principal as and when due, with the ever rising reliance on external loans post 2013 elections. This capacity is clearly not backed by any improvement in the productive capacity of the country thereby necessitating Finance Secretary Waqar Masood's assurance to prospective Eurobond buyers during a road show in London earlier this year that the country would seek another International Monetary Fund (IMF) loan as and when the current progarmme ends next year. Disturbingly this assurance was critical even though the return on Eurobonds was 7.5 percent for five year and 8.5 percent for 10 year maturity - returns almost double those offered by other countries including debt ridden Greece. More recently the Ministry of Finance refused to openly brief the Senate Standing Committee on Eurobond returns as well as the names of purchasers, thereby raising speculation that some key cabinet members may have purchased them, and requested an in-camera meeting - a request that defies logic as the information has been made available by the State Bank of Pakistan.
However, Dar's honeymoon period is clearly over and during this month alone two Western sourced report/statement expressed concerns with respect to the sustainability of our foreign exchange reserves: (i) Bloomberg report dated 2nd November 2015 stated that "Pakistan's record foreign-exchange reserves are masking economic weaknesses that risk pushing the nation towards more aid from the International Monetary Fund. At least half of the country's $20 billion stockpile comprises debt and grants, almost all of which have flowed in since Prime Minister Nawaz Sharif took office in May 2013;" and (ii) IMF Mission chief acknowledged on 6th November that our reserves are not sustainable in the long run.
The Prime Minister continues to ignore four alarming patently evident trends in the economy. First, a massive rise in external and domestic borrowing; the State Bank of Pakistan website notes that up to September 2015 (i) long term debt was 56 billion rupees, (ii) short term high interest bearing debt was 1.34 billion dollars - data does not include the 2 billion dollar Eurobonds and one billion sukuk issued at rates well above the prevailing global rates; and (iii) IMF debt was 4.5 billion dollars. The comparable figures for 2012-13 according to the Economic Survey were 43.6 billion dollars, 0.2 billion dollars and 5.3 billion dollars respectively. Clearly reliance on external sources has increased by 12.4 billion dollars during the past two years and a quarter for long term debt and by 1.14 billion dollars short term debt. Domestic debt was around 2 trillion rupees in 2013 and is now estimated at 20.7 trillion rupees by the SBP.
Second, a decline in exports is attributed not as much to security threats but to Dar's policy to keep the rupee overvalued (objective: to understate his growing reliance on external borrowing - a policy that he boasted he supported as he was borrowing at 5 to 6 percent from abroad and retiring domestic debt procured at 12 percent). So what is wrong with this seemingly sensible policy? As a student in freshman economics learns during his/her first week in college, common sense is really nonsense; and this seemingly common sense policy is really nonsense because Dar failed to take account of the annual rupee depreciation which conservative estimates place at 5 percent but which in recent months has been much higher.
Thirdly, foreign direct investment is declining and that is also attributable to a number of Finance Ministry actions including inordinate delays in giving refunds to local and foreign investors including multinationals with the Overseas Investment Chamber of Commerce and Industry (OICCI) claiming that the government owes 45 billion rupees in refunds to its members.
And, finally, poor governance! Nawaz Sharif firmly believes that his mega energy projects to be completed by 2017, before the 2018 general elections, would guarantee his re-election; however, he appears to have abandoned an attempt to improve governance in the sector which accounts for a circular debt higher than what the Sharif administration inherited with transmission and distribution losses marginally lower and with the policy to raise charges to fund these inefficiencies likely to continue. The Prime Minister would do well to recall that a third-party audit carried out during the PPP-led coalition government maintained that generation capacity was over 20000MW but capacity utilisation was during summer months less than 9000MW.
The question is why is the Prime Minister not taking note of the three worsening trends (decline in exports and foreign direct investment as well as poor governance) during his administration's tenure in comparison to the Zardari years that were marked by mega scams, seriously flawed senior appointments (with FA pass chairman of Oil and Gas Regulatory Authority epitomising complete disregard for merit) and using state-owned entities as recruitment centres for party loyalists? The answer in a nut shell is that he reckons the 341 billion rupee farm package as well as the mega projects including the 46 billion dollar envisaged investment under the China Pakistan Economic Corridor would provide the necessary fuel to the economy that would generate employment and raise the standard of living of the people.
There is no doubt that the CPEC can be a game changer for Pakistan in spite of the fact that China is not extending grant assistance but loans and has requested Pakistan to bypass its Public Procurement Rules Authority (PPRA), which is angering other countries as it would bar them from participating in these projects. However the CPEC requires some government funding and that is being made increasingly difficult by Dar who has already agreed to a 20 percent slash in development spending. In addition, the 40 billion rupees revenue shortfall in the first quarter is being met through enhanced taxes and Dar's contention that the raise in taxes is only on luxuries reflects his lack of understanding of the way the system works in this country namely higher tax on imported luxury items simply fuels smuggling and would almost certainly not lead to higher revenue collections. The Prime Minister further complicated matters for Dar by announcing the 341 billion rupee farm package though the actual additional impact on the economy of the package would be around 100 billion rupees - the government budgeted only 25 billion rupees as subsidies for fertilisers and half the farm package is credit that is not to be funded from the budget though one doubts if the private financial sector would fund it. Or in other words the farm package would increase the revenue shortfall.
To conclude, the Prime Minister needs to revisit Dar's economic policies which are compromising growth through his focus on deficit reduction, improve tax collections not through accounting jugglery but through reforming the tax system to render it fair and equitable, and control the rise in current expenditure that is not attributable to higher than budgeted outlay on defence as claimed by Dar but on interest payments on domestic and external loans as well as on Eurobonds/sukuk that he issued at rates well above the market rate.
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