Pakistan’s economy has reached an impasse yet again and perhaps this played as much of a role in de-seating Imran Khan as did the usual suspects — both within and outside the country.
Pakistan has had 14 finance ministers since 2008 including one caretaker finance minister — six during the Zardari-led government, two during PML-N tenure and 4 during the Khan administration. Not counting the plug-ins or those appointed to ensure that the day to day business continued smoothly as the identified candidate’s date of availability was not immediate, five men stand out with two doing a stint twice.
Shaukat Tarin was appointed Finance Minister on 8 October 2008 and resigned on 22 February 2010 citing personal reasons though many at the time contended that he resigned due to serious differences on policy matters with the then President, Asif Ali Zardari.
He negotiated a programme with the International Monetary Fund (IMF) with the usual ingredients notably politically challenging power and tax sector reforms, privatization of loss-making units angering their staff, and a contractionary monetary and fiscal policy regimen that would support the balance of payment position and strengthen the country’s depleting reserves but with a politically untenable fallout: high inflation, particularly food inflation, that peaked at over 23 percent.
In his second avatar as the head of the finance ministry - 16 April 2021 to 10 April 2022 – Tarin inherited: (i) an economy in a much worse situation than in 2008 due to sustained failure to implement structural reforms as well as the fallout of the pandemic; and (ii) an IMF programme with harsh upfront conditions which he learnt were non-negotiable.
His attempt to renegotiate delayed the sixth review staff level agreement and therefore the tranche release by three months – 4 June 2021, the scheduled date of the review, to 3 September 2021. The seventh review was also stalled though this time the suspect was the previous prime minister’s unsustainable 28 February relief package envisaging a decline of ten rupees per litre in petroleum and products (with a twin hit on the treasury - lower revenue collections as well as higher subsidies) and a decline of 5 rupees per unit in electricity tariffs effective till 30 June 2022.
Tarin defended this financially unsustainable package, overriding speculation that he learnt of the package the same time the rest of the country did – as the prime minister announced it, by stating that 200 billion rupees required for the package would be financed from the outstanding dividends of 1.2 trillion rupees from oil companies – dividends not paid by these companies for several years due to severe liquidity crisis that accounts for a circular debt of 2.5 trillion rupees today.
He also mentioned diverting savings from Covid Ehsaas programme though he failed to mention the exact savings amount.
Tarin’s immediate successor during the Zardari-led government and immediate predecessor during the Khan administration was Hafeez Sheikh — de facto finance minister from 18 March 2010 to 19 February 2013 and 18 April 2019 to 29 March 2021.
In 2010, he inherited a set of policy conditions that he failed to implement though he subsequently placed the onus on the then President Zardari, while he tackled food inflation by reducing the weightage of food in the calculation of the Consumer Price Index by 6 points.
In 2019 Sheikh negotiated the package with the Fund which was highly contractionary with the IMF projecting an inflation of 13 percent.
And while during the previous tenure he had attempted to check prices by trying to curtail government expenditure through employing delaying tactics (for example setting up a committee to verify the demand for money by ministries/divisions) yet in his more recent tenure he did little to check government’s current expenditure which rose from the budgeted 6.4 trillion rupees (5.589 trillion rupees as per the revised estimates) in 2018-19 to budgeting 7.136 trillion rupees for 2020-21 or a rise of 11.5 percent.
Summary of the consolidated federal and provincial expenditure notes that actual expenditure was contained at 6.264 trillion rupees in 2020-21 with around 250 billion rupees cut in domestic mark-up payments than budgeted (the contractionary monetary policy was abandoned by the SBP subsequent to the onset of the pandemic with the discount rate cut from 13.25 percent to around 7 percent mid-2020), and deferral of foreign loan repayment by the G7 (with 1.245 trillion rupees paid under this head in 2018-19).
Ishaq Dar’s contribution to the economic impasse that was inherited by the Khan administration needs no elaboration.
He made three major errors which no economist could have supported, not even those with little backbone to resist unsustainable policies of their boss, the Prime Minister: (i) to wipe out 480 billion rupees of the energy sector’s circular debt that was later declared illegal by the Auditor General; however by failing to tackle the root of the sector problems the PML-N left a circular debt of 1.2 trillion rupees in 2018; (ii) over-valuing the rupee led to the current account crisis that was inherited by the Khan administration and to argue that the crisis today is worse than in 2018 does not absolve Dar of taking patently flawed measures; and (iii) compounding this flawed policy by borrowing heavily from abroad by arguing that the interest rate abroad was half that in the domestic market which left the economy on a ventilator as he slunk out of the country.
Asad Umar’s short tenure (around seven and a half months) was marked by two factors. First, proactive public relations by the country’s chief executive and the chief of army staff to access loans from three friendly countries, around 10 billion dollars was mobilized though pledges (private investments, government loans and duration of oil facility) by two countries were not kept – pledges that prompted the inexperienced government to delay negotiations with the IMF.
However, reports indicate that the package with the Fund was near completion during the IMF/World Bank’s spring annual meeting in 2019 and the conditions agreed were a lot less harsh than the ones accepted by the new economic team leaders on 12 May 2019.
And, second, Umar unlike Hafeez Sheikh and Dar was elected and listened to economists and accommodated their views in policy decisions.
The fourth man into his second stint though the first one was of very short duration (27 December 2017 to 27 April 2018) is Miftah Ismail.
That he did begin to correct Dar’s policies particularly the overvalued rupee subsequent to the visit of an IMF mission stands him in good stead however the budget he presented in April 2018, two months before the usual time, indicates that it was an election year budget and to begin to analyze it in economic as opposed to political terms may be unfair. Be that as it may, his attempt to lower taxes, while arguing that this would encourage more people to pay taxes honestly (backed by empirical studies in the West though the audit capacity of FBR can hardly compare with say the US Internal Revenue Service) was never put to the test.
Be that as it may, Miftah is unelected today as he was in 2018 and therefore must focus on the momentous task at hand and desist from brash comments. He generated much anger in March 2018 when he offered Pakistan Steel Mills free to anyone who bought the loss-making Pakistan International Airlines.
Recently, in his press conference before departure he imitated the previous Prime Minister by waving a paper in the air – a task he should leave to the relevant cabinet members.
To conclude, Ismail appears to be a good choice as he has the ability to listen to good advice, he is credited with allowing the rupee to reach its market equilibrium up to a point in 2017-18, and has the smarts to get a little more maneuvering room to phase out some of the very harsh upfront conditions for the seventh review by citing the IMFs recent analysis of the devastating effect of the Russia-Ukraine war on heavily indebted countries.
Further to widen the room to maneuver for the eighth review he would need all-out support from not only across the political divide but also the recipients of current expenditure, be able to raise revenue from direct taxes instead of indirect taxes whose incidence on the poor is greater, and reduce the deficit to a sustainable level.
Copyright Business Recorder, 2022
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