Dr Hafeez Sheikh, twice dismissed as the country’s finance minister, made a distinction between stabilisation and growth as he began his second stint in April 2019 – he defined the former as an unsustainable current account deficit, the rationale used to implement severely contractionary fiscal and monetary policies agreed with the International Monetary Fund (IMF) on 12 May 2019, arguing that once stabilisation is achieved, then the focus would be on growth promoting policies.
Soon after Dr Sheikh’s dismissal in April 2021, two years after his appointment, the growth rate for 2020-21 was upgraded to 3.9 percent, instead of the earlier projection of 2 percent, surprising the government as well as the donors (including the IMF) – a rise attributable to: (i) higher consumption after the lifting of the pandemic-related lockdown sourced partly to the pile up in inventories – a global phenomenon; and (ii) higher output notably of cars and cement (consumer items) due to targeted incentives including amnesty to the construction sector. Thus Dr Sheikh may well claim that as he had argued/predicted the patient (the economy) was recovering due to his prescriptions even though the medication had been extremely hard to swallow for the general public, believed to be the reason for his summary dismissal.
Dr Sheikh and Dr Reza Baqir (appointed as Governor State Bank of Pakistan on 6 May 2019 to-date), the two signatories to the IMF programme that identified the hard to swallow medication, never defined stabilisation as access of the general public to resources essential to life – food and housing. That refrain was taken up by Prime Minister Imran Khan through the Ehsaas programme instead of through the monetary and fiscal policy tools available to all governments; and with extremely limited fiscal space — a factor also constantly cited in advanced countries for example the allocation for the British National Health Service resurfaces every election cycle — Prime Minister Imran Khan’s ability to provide adequate support to the poor and vulnerable has remained compromised to this day with a rising number of critics claiming, with a degree of veracity, that its expansion is not even keeping pace with the steady rise in prices. In recent months, the SBP has been claiming credit for cheaper/free credit to target groups however these programmes are initiated by the executive (Kamyaab Pakistan programme/farmers card, etc.) rather than the SBP and are generating liquidity (with at best a time lag before output comes on the market) that is further fueling inflation.
It is however critical to note that what the Khan administration inherited in August 2018 was much worse than the situation prevalent in April/May 2019 when Dr Sheikh/Dr Baqir were appointed. Imran Khan’s first economic team led by Asad Umar as the finance minister and Tariq Bajwa as Governor State Bank of Pakistan (an Ishaq Dar appointee who retired as Secretary Finance and therefore should have been the last person to be appointed as Governor) succeeded in bringing down the trade deficit from around 30 billion dollars to 26.23 billion dollars (a decline of 12.8 percent in seven and a half months) with the rupee allowed to depreciate from 122 rupees to the dollar in September 2018 to 140.6 rupees to the dollar on 6 May 2019 - 15.8 percent depreciation.
Dr Sheikh and Dr Baqir began the implementation of severely contractionary policies which led to a trade deficit July-April 2019-20 (prior to the onset of the pandemic) of 19.6 billion dollars (or a decline in nine months of 25.4 percent at a prohibitive cost paid for by the general public). Today the situation is again dire as in July-November 2021 the trade deficit widened to 20 billion dollars and at this rate the trade deficit would be more than 40 billion dollars by the end of the year – higher than the 30 billion dollars inherited by the Khan administration. The Prime Minister has now begun claiming that this cycle of boom followed by a trade deficit-led widening current account deficit is an endemic condition for this country but sadly has not focused on the rise in the scale of the trade deficit.
A major positive element in the economy during the Khan administration has been the steady rise in remittance inflows, a major component of the current account deficit, for which the Prime Minister has taken credit as the man trusted by overseas Pakistanis as has the State Bank of Pakistan (SBP) for implementing policies to attract overseas Pakistanis to use official channels instead of the hundi/hawala system. However, studies indicate that the rise in remittances – from 21.8 billion dollars in 2018-19 to 23.1 billion dollars in 2019-20 to over 29 billion dollars in 2020-21 – was mainly due to the global lockdown and as it is being eased remittance inflows have begun to decline.
While hindsight is fifty-fifty yet given their academic credentials one would have hoped that the Dr Sheikh/Dr Baqir team had initiated some out-of-the box policies rather than simply agreeing to the same policies as in the previous twenty-one IMF programmes, only considerably harsher as structural issues left to fester over time became ever more intractable with, therefore, more disastrous consequences for the quality of life of the general public.
The question is can the rise in imports be dismissed as a cyclical problem facing Pakistan whereby growth is always accompanied by high imports – a refrain recently taken up by the Prime Minister? Or is it due to the ongoing global pandemic disrupting supply routes accounting for a rise in international prices – constantly cited by the SBP and the Ministry of Finance? Or is it due to the persistent failure of our governments, including the incumbent, to implement easily reversible monetary and fiscal policies while not proceeding with the politically challenging structural reforms (in all sectors particularly the power and tax sectors) with neither the executive nor the SBP citing this as a factor? Probably an amalgam of all three though if structural reforms were implemented in letter and spirit it is doubtful if the situation would have been as dire as it is today.
So was stabilisation achieved, a contention premised on the 3.9 percent growth last year, or whether there is still a way to go given that the trade deficit has begun to rise, in spite of the sustained rise in remittance inflows. The answer is as bald as Imran Khan’s claimed ‘absolutely not’ to US demands. Exports have risen in value not sourced to the government’s easing of monetary and fiscal incentives post-pandemic as claimed ad nauseum but as prices of our exports have risen in the international market and the volume of exports has risen only marginally (in other words, Pakistani exports too have benefitted from a rise in international prices). In their defense however it is relevant to note that gas shortages today, due to failure to import RLNG on time, and a rise in administered prices agreed with the Fund under the sixth review are going to render many a Pakistani exporter uncompetitive in the world market.
Imports have risen due to rising prices of our major import items (petroleum, cooking oil, sugar and wheat) in the international market as well as capital imports (machinery projected to raise output and exports) accounting for a rising trade deficit. And the sustained rupee erosion is an inflationary and anti-poor policy given the traditional reliance on imports of fuel and cooking oil (with recently heavy imports of wheat and sugar to mitigate the colluders operating in various markets) and is contributing to higher than budgeted mark-up.
As per Fitch rating agency the current account deficit would widen to 2.2 percent of GDP in FY2021/22 up from 0.6% in FY20/21, as the trade deficit widens.
Thus the stabilisation phase is not over by any means and all those who claim otherwise must look at the prior IMF conditions that the government pledged to implement on 21 November 2021, which incidentally are politically extremely challenging and remain pending. Tarin claims that they are not as harsh as agreed in February this year yet the conditions he has publicly acknowledged do not reflect any significant change.
To conclude, the options for the government are severely limited but three policy decisions would give the country more leverage in terms of the seventh review. First, to begin to undertake meaningful structural reforms starting with the energy and tax sectors. Second, slash current expenditure mercilessly (including making policy changes where required for example ensuring that employees also contribute to their pension funds) and all recipients under this head must voluntarily make a sacrifice. And finally, the discount rate which is well above the regional average, and an undervalued rupee must be proactively dealt with.
Copyright Business Recorder, 2021
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