The economic malaise

EDITORIAL: Finance Minister Shaukat Tarin stated during a scheduled press conference that the International Monetary Fund (IMF) should have no concern over the Prime Minister’s 28 February relief package - with 10 rupee per litre reduction in fuel prices across the board, 5 rupee decline in per unit electricity tariff (though its exact modalities as to who would benefit are still being worked out) and a 2000 rupee additional disbursement every quarter to the 5.7 million Benazir Income Support Programme (BISP) beneficiaries - as neither the budget deficit nor borrowing will rise. His choice of words would raise concerns on two counts.

First, he claimed that the package was discussed with the Fund ‘as much as was needed’ while the Resident Representative of the IMF texted Business Recorder the day after the relief package (and the same day as the industrial package was announced with the third amnesty of this administration, this time to the industrial sector minus a few sectors), was announced that, “the authorities and the IMF will discuss during the upcoming seventh review talks the merits of the recently adopted relief package and other measures to promote macroeconomic stability amidst a challenging external environment.” Thus Tarin needs to to explain what he meant with ‘as much as was needed’ and additionally even if the IMF was informed of the package before it was announced yet its take on the package was clearly not sought and deferred for the seventh review talks which are likely to be as challenging as the ones for the sixth review.

And secondly, Tarin’s claim that the budget deficit would not rise and neither would borrowing, is premised on three claims which need further clarification: (i) that the outstanding 1.2 trillion rupee dividend from oil companies would fund the relief package up to 200 billion rupees may be wishful thinking as the dividends have not been paid for several years due to the liquidity issues of the sector, emanating from sustained appalling sectoral performance, that has fueled the circular debt that is at present around 2.5 trillion rupees – a rise that accounts for the World Bank/IMF insistence that the base tariff be raised and fuel adjustment charges passed on to achieve full cost recovery; and (ii) savings from Covid Ehsaas programme though he did not mention the 11 billion rupees additional for BISP beneficiaries during the next three months.

One would of course assume that like in the past the main casualty would be public sector development programme which, in turn, would imply lower growth rate, as it is an engine of growth in this country, that may well explain the recent Monetary Policy Statement’s (MPS’s) contention that “growth continues to moderate on the back of high prices and demand-easing measures.”

The key question is whether a change in government or at the helm of the Finance Ministry would change the economic impasse that the country faces? There is no doubt that the Khan administration irrespective of rhetorical claims to the contrary significantly raised its reliance on borrowing – domestic from 16.5 trillion rupees in 2018 to 27 trillion rupees today, a rise of 75 percent in three years and a half and external borrowing from 95 billion dollars in 2018 to over 130 billion dollars today, or a rise of 35 percent, with 10 billion dollars acknowledged by the government to have been used for budget support in general and current expenditure in particular.

While Asad Umer had shown a tendency to heed the advice of economists and had reportedly negotiated an IMF package that was considerably less harsh and upfront then the one agreed by his successor, conditions that quickly used up the considerable political capital of the new administration, yet with fast changing geopolitical considerations as well as grappling with adverse external elements including the onslaught of the pandemic and the recent Russia-Ukraine conflict Pakistan’s leverage with the Fund has eroded almost completely.

The incumbent finance minister may disclaim responsibility for some of the harsh conditions as they pre-date his appointment yet his decision to raise current expenditure to a high of 7.5 trillion rupees – a trillion rupees more than last year without any interest or repayment on loans budgeted in the current year due to the G7 Debt Relief Initiative – is untenable. It is important to note that Tarin is a banker and not a qualified economist albeit an honest man who is rightly credited with ensuring third party audit of the then controversial rental power projects in 2009.

And as a banker he may be convinced that extending interest free loans without collateral to those with no access to the formal banking sector will fuel productivity and growth and break the nexus of the middleman (aarthis) in the farm sector yet he should also be aware that releasing more money into the economy at this stage would simply fuel inflation and with demand easing measures in place as per the MPS small businesses are unlikely to take off.

Nawaz Sharif’s financial czar Ishaq Dar was also not a qualified economist but an accountant and his decision to balance the books by borrowing externally (as the rate of return abroad was lower than the domestic rate at the time) and keeping the budget deficit low through a grossly overvalued rupee set the stage for the historically high current account deficit in 2018.

One can only hope that in the event that the PML-N ever comes to power again it will have the sense to give Dar a Ministry other than Finance. The PPP during its last stint in power relied on the Sheikh-Tarin duo, though the order of appointment was reversed, and one would be forced to conclude that repeat performers - be it during a civilian or military dispensation - have not performed any differently second time around which accounts for the country on its twenty third Fund programme and with the end of the ongoing Extended Fund Facility programme approaching there is talk of the need to go on yet another programme loan.

Pakistan needs a strong qualified finance minister with the capacity to resist pressure from all forces – be they political or institutional. Sadly, to date none of the finance ministers appointed has been unable to undertake the task at hand which is becoming ever more challenging with the passage of time.

Copyright Business Recorder, 2022