The Pakistan Muslim League Nawaz (PML-N) is at pains to point out the unprecedented rise in unemployment and inflation during the nearly seventeen month tenure of the Pakistan Tehrik-i-Insaaf (PTI) government, twin indicators that determine any government's popularity rating. The PTI, in turn, went on the offensive from day 1 since it took over power, and accused the PML, and its predecessor PPP, for being responsible for the appalling state of the economy that it inherited. The question is which, if any, party is presenting the correct picture?
The PML-N leadership in its 'white paper' titled 'Clarion Call Rescue Economy 2018-19' has projected Gross Domestic Product (GDP) growth rate for 2020 at 2.8 percent (Asian Development Bank data though the International Monetary Fund projection in its first review remains at 2.4 percent and perhaps the most realistically the UN has projected 2.1 percent), gross public debt at 32.7 billion rupees (against 24.9 billion rupees in June 2019) and inflation at 12.7 percent (against 7.3 percent in 2018-19).
The government's economic team leaders are claiming that stability has been achieved and the 2020 objective is high growth rate, a narrative that the Prime Minister appears to have accepted hook, line and sinker. In this context it is relevant to note the three major components of the 12 May 2019 IMF staff level agreement reached by our economic team leaders' that are contributing to a marked reduction in an across the board quality of life of the people of this country: (i) the adoption of market based exchange rate and the focus of Sheikh/Baqir to post-July 2019 rupee stability ignoring the fact that the rupee remains undervalued (around 5 percent at last count by the SBP) which, in turn, is contributing significantly to domestic inflation. Thus the recent rise in petroleum prices (with an impact on cost of transport of both goods and people) and electricity rates (power generation from imported fuel including RLNG) is being passed onto the consumers and productive sectors under the guise of pass through with the UN report courageously acknowledging that the 'managed depreciation' is 'complicated by increases in energy tariffs that have been imposed as part of the fiscal reform package.' Additionally, each rupee erosion vis-a-vis dollar is adding 100 billion rupees to the government debt; (ii) the prohibitively high discount rate of 13.25 percent since July 2019 has raised input costs as well as the cost of borrowing by the government with a consequent negative impact on the budget deficit; and (iii) prime minister's adviser on finance Dr Hafeez Sheikh disbursed less than one percent for the Prime Minister Ehsaas programme during the first six months of 2020 while the public sector development programme received only 8.8 percent of what was budgeted during the first quarter of 2020. In other words, both private and government sectors outlay for productive activity, which contributes to GDP growth rate and employment declined, while Federal Board of Revenue has, as expected, been unable to meet the unrealistic targets agreed by Sheikh with the IMF. Thus the budget deficit came down dramatically during the first quarter of the year only because the social sector and development budgeted amounts agreed with the Fund have not been released. With the completion of the verification exercise by Benazir Income Support Programme in December 2019 the pace of disbursements will pick up, so stated Dr Sania Nishtar in an interview to Business Recorder; however, it is unclear how much would actually be disbursed as revenue and expenditure constraints evolve during the rest of the fiscal. It is also noteworthy that the Finance Division compelled Dr Nishtar to surrender 6 billion rupees to Utility Stores Corporation, a decision taken by the Prime Minister to reduce inflationary pressures on the poor and vulnerable though it is unclear he is aware of the source of the money.
Prime Minister Khan while accepting the narrative of his economic team leaders is nonetheless showing some concern at the price hike, the low productivity and consequent unemployment, the failure of exports to rise by as much as is required and has: (i) externalized the problem (by accusing the media for an inaccurate portrayal and/or his media team for failing to present convincing arguments); (ii) accusing the administration of not checking runaway profiteering by the unscrupulous traders/wholesalers; and (iii) distributing health cards, and announcing other direct grants and more recently by deciding in a cabinet meeting to recruit 129,301 against vacant posts in ministries/divisions.
Be that as it may, the foregoing does not absolve the PML-N from its five years of flawed policies which without doubt accounted for historically high twin deficits - a current account deficit of 18 billion dollars and a budget deficit of 6.6 percent of Gross Domestic Product as per the Fiscal Statement of 2018-19 issued by the Debt Policy Coordination Office Ministry of Finance which maintained that: "fiscal deficit was the highest during last five years to stand at 6.6 percent of GDP. This high level of fiscal deficit was financed mainly by borrowing from the banking system, which not only led to a faster accumulation in public debt, but also stoked inflation."
Dar's flawed policies were indicative of his educational and professional limitations as an accountant which led him to take decisions that included: (i) heavy borrowing from abroad - commercial banks and debt equity - and converting domestic debt into foreign debt by arguing that the rate of return on foreign debt was considerably lower. This decision allowed him to keep reserves high (propped up by debt) and budget deficit artificially down; coupled with (ii) an overvalued rupee which negatively impacted on exports as well as artificially kept debt low.
Once corrective measures were employed (and the Shahid Khaqan Abbasi-led administration began depreciating the rupee in December 2017 though as it was an election year not by as much as was required) the country's reserves eroded, and current account deficit rose to an unprecedented high level. Thus no independent economist can support the resurgence of the political fortunes of Ishaq Dar and one can only hope that the PML-N leadership reconsiders defending Dar's flawed policies and/or to continue to consider him as a finance minister in waiting.
PTI's economic team is reportedly led by two (out of a total of five) former finance ministers appointed by the Zardari led government (2008-13). The five finance ministers of the Zardari era are as follows: (i) Ishaq Dar (a PML-N nominee appointed as part of the coalition government) though if his claim of being the architect of Benazir Income Support Programme is accurate then he deserves merit; at the same time his frequent attacks on data manipulation during Musharraf's dictatorship did not serve national interest; (ii) Naveed Qamar, acting finance minister till the appointment of (iii) Shaukat Tarin who took the country on an IMF programme and resigned early 2010 reportedly for personal reasons but with many arguing that his resignation was due to the Zardari government's refusal to implement the agreed power and tax sector reforms; Tarin during his tenure exhibited a backbone that is unprecedented in our history, by insisting on a third party audit of the rental power projects. His integrity is not in question though many argue that his academic credentials are second to many finance ministers we have had, including the incumbent; (iv) Hafeez Sheikh during whose tenure the IMF programme was suspended and negotiations for yet another programme had begun by late 2012 though he resigned on the basis of a pledge to be the PPP nominee for caretaker prime minister; and (v) Salim Mandviwalla, a PPP loyalist.
Amongst the five Zardari appointees two have been retained by Imran Khan - Hafeez Sheikh with the status of a full federal minister and Shaukat Tarin reportedly working behind the scenes on various economic-related matters though he has refused a more formal role till he is exonerated in the ongoing case registered against him. There is a clear balance between integrity and academic credentials in Imran Khan's selection however public sentiment is clearly moving against the Prime Minister as revealed in the IPSOS poll results. This necessitates tweaking of policies/strategies and unfortunately the Prime Minister's focus on outright grants, to the poor directly or through USCs, does not tackle the root problem of high inflation and rising unemployment.
To conclude, the Prime Minister needs to focus on tweaking policies under implementation or else he may be forced to face the prospect of social unrest.
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