EDITORIAL: The sudden removal of finance minister Dr Hafeez Sheikh from the federal cabinet, with nearly nine weeks remaining in his tenure and presentation of the next year’s federal budget around the corner, speaks volumes about the Prime Minister’s evaluation of his performance and the sense of urgency with which he took this action. The general consensus is that Sheikh, who signed the International Monetary Fund (IMF) agreement as the country’s de facto finance minister, would have been shown the door a lot sooner but for the onslaught of the pandemic which compelled a reversal of the harsh monetary and fiscal policies agreed with the IMF on 12 May 2019 that had stifled economic activity. The then Secretary Finance, Younus Dhaga, was reportedly refrained from attending the meetings with IMF staff as he had opposed the unrealistic revenue collection target of 5.5 trillion rupees for 2019-20 especially given the projected 1.5 percent growth rate.
Critics of the Prime Minister may cite Sheikh’s dismissal as a U-turn by the Prime Minister as he was visibly supportive of him when Sheikh lost to Gilani in the 3 March 2021 Senate elections, and reportedly asked Sheikh to carry on working; however this reasoning ignores two very significant factors that may have played a critical role in Sheikh’s removal. First and foremost, there was a growing disenchantment with Sheikh within the party in terms of his personality – not being available to meet with Pakistan Tehrik-i-Insaaf (PTI) parliamentarians as well as the rising frequency of their constituents expressing anger at the unabated rise in food prices. Midway into his tenure the Prime Minister could no longer ignore the legitimate concerns of his parliamentarians. Sheikh also displayed a penchant for passing on the buck to his subordinates or those departments/entities that came under his jurisdiction. During his 23 months – as advisor and more recently as the finance minister – Sheikh appointed four FBR chairpersons and three Finance Secretaries. Thus while the country’s chief executive may have been willing to accept this state of affairs for one or two senior staff changes yet he would eventually come to question the capacity of the team leader.
Second, there was no out of the box thinking during his tenure at the helm of economic decision-making; the only point of difference from his predecessors was in accepting the harshest ever upfront conditions in the ongoing 23rd IMF programme in comparison to the previous 22 programmes. While in his own support he may correctly point out that he had inherited the worst ever state of the economy with a current account deficit of 20 billion dollars yet his failure to understand the compulsions of a democratically-elected government is astounding especially given the fact that he faced a similar situation during the Zardari-led government when it refused to implement the politically challenging tax and power sector reforms agreed with the Fund leading to the suspension of the Fund programme. One lesson that he should have learned is that implementing reforms in these two badly performing sectors (Power and Public Sector Enterprises) would take time as entrenched vested interests would vigorously oppose their implementation.
Sheikh’s inordinate focus remained on achieving a primary surplus - an IMF time-bound condition - faithfully cited as an accomplishment by the prime minister. But perhaps in time Prime Minister Khan came to realize that the primary surplus was achieved through a dramatic rise in domestic borrowing costs (reliance on domestic borrowing and converting short-term borrowing to long-term borrowing that raised domestic debt servicing from 1.12 trillion rupees July-December 2019 to 1.356 trillion rupees July-December 2021 - a rise of 21 percent). Foreign debt servicing was minimal due to the debt relief initiative of G-20; however, the reliance on foreign debt as per the Letter of Intent at the start of the IMF programme in July 2019 acknowledged the need for 38.4 billion dollars during the 39 months of the programme – a historic high. Thus reducing reliance on borrowing which was a major PTI manifesto promise was severely compromised during Sheikh’s tenure.
It is important to note that the timing of the change at the ‘Q block’ (ministry of finance) deserves a comment. On 16 February 2021, the staff-level agreement on second to fifth quarterly review was reached with the IMF and on 24 March the Fund board approved disbursement of the 500 million dollar tranche. This would allow Sheikh’s successor Hammad Azhar to learn the ropes fast before the next quarterly review. However, the 16 February agreement without doubt set time-bound targets and structural benchmarks that would have to be adhered to in the budget for 2021-22 which would have been under preparation since early this year. It is unlikely that Azhar would be able to recalibrate the targets – fiscal or expenditure – and in that sense would be working with the very same cards that were dealt to Hafeez Sheikh. However, within these constraints one would hope that Azhar, who visited the ‘Q block’ where he held an introductory meeting with officials yesterday, begins to reform the tax structure itself and ceases to rely on low hanging fruit to raise revenue and, equally importantly, actually reduces current expenditure by insisting on sacrifices by all rather than just by the prime minister, the presidency and civilian and military staff through an income freeze policy.
Thus, Azhar’s job is cut out for him. He would need to focus on reducing the budget deficit as it is a highly inflationary policy and encourage domestic savings, thereby strengthening the capacity of the country to invest with its own savings rather than through foreign savings/borrowing.
Copyright Business Recorder, 2021
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