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In April of this year, when Mian Shehbaz Sharif became prime minister and appointed me as finance minister, Pakistan had about $10.5 billion in foreign exchange reserves. Our reserves had fallen by $7 billion since February and were depleting at an unsustainably fast pace.

Our imports were breaking all past records and in the fiscal year increased to $80 billion. Against exports of $31 billion and remittance of $30 billion, these record high imports led to the third highest current account deficit at 5% of GDP or $17.5 billion. (The highest current account deficit of 8.1% of GDP ($11.7 billion) was in 2007/08 and second highest of 6% of GDP was in 2017/18 ($19 billion).

As we planned for the next fiscal year, the prime minister and I were looking at foreign exchange needs of $24 billion for debt repayment and at least $12 billion to finance the current account between April 22 and June 2023.

We were also mindful of what was happening in Sri Lanka which had just defaulted. Our economy too was in an acute danger of default. In fact, Bloomberg had reported Pakistan to be the fourth likeliest country to default.

In December of 2021, when the PTI government had revived Pakistan’s IMF programme post the Covid relaxation, it had agreed with the Fund that it will run a primary deficit – that is, total deficit of Rs 25 billion for the year. Yet four months later when I joined the government, I was informed that we were going at a pace of Rs 1300 billion for the primary deficit, an outcome 5200 percent worse than PTI’s commitment. We were going to make a record budget deficit of over Rs 5000 billion, indicating that our domestic fiscal situation too was getting unsustainable.

The PTI government had also agreed with the Fund to increase petroleum levy by Rs 4 every month until it reached Rs 30 per litre and to increase sales tax by 2% every month until it reached 17%. But in February, Imran Khan unilaterally decided to withdraw all taxes and indeed started subsidising petrol and diesel. At one point the government was losing Rs 80 per litre on diesel and Rs 40 per litre on petrol. We were selling petrol cheaper than the UAE and diesel cheaper than both Saudi Arabia and the UAE. Since a billion litres of each fuel was being consumed (and hoarded) every month, our losses reached as high as Rs 120 billion per month. This was more than our defence expenditures, more than twice our development expenditures and more than three times the cost of running the entire civilian federal government. This large subsidy was unique in the world and in our history. And it was suicidal.

Pakistan’s default risk had gone so high that fresh commercial borrowing or issuance of bonds had become an impossibility. When a country doesn’t have enough foreign exchange to cover three months of imports, and it’s not in an IMF programme, then no multilateral institution, such as the World Bank, lends to it. Even friendly countries were not willing to lend to us. They did, however, advise us to restart our IMF programme and helped us achieve it. (The only exception was China which had withdrawn its loan of $2.3 billion in March but lent back to us in June but only after PM Shehbaz Sharif’s personal intervention).

At that point we were burning through $3 billion in foreign exchange due to repayments and financing of the current account. Without that lender-of-the-last-resort IMF and substantial belt tightening, June or July was the limit of our solvency. We had to act resolutely and raise the prices of fuel, power and gas.

For me, the prime minister and most of our cabinet colleagues the choice was obvious. The Pakistani economy was in imminent danger of default and this was no time for politics as usual. For most of us personal ambition and political calculus took a back seat to the interest of the state. For most of us, but not all of us. I was relentlessly criticised for making hard choices by many analysts and politicians who refused to believe that Pakistan was in grave danger of default and we had no margin for error.

At budget time to bring the deficit under control we had to raise new taxes. It would’ve been easy for us to raise sales tax by 1% and put that burden on consumers. But we chose to tax the richest Pakistanis more. To his credit the prime minister was quite pleased when I imposed ten percent extra tax on sugar mills – two of which are owned by his sons.

To add to our challenges, our power sector was a complete mess. Pakistan was importing costly furnace oil, diesel and LNG and using them to make very expensive power. Then distributing that power in a most inefficient and theft-prone manner. And finally, failing to collect enough bills. The money being bled by the power ministry was enough to destroy our economy. PTI had increased power-sector circular debt from Rs 1100 billion to Rs 2400 billion and introduced gas sector circular debt, which is Rs 1300 billion.

In addition, many energy sector companies are essentially bankrupt.

When we assumed the government, power plants of 7500MW capacity were shut down either due to maintenance issues or not having money to buy fuel. We had to fix those issues and restart all the plants as May was one of the hottest months and demand for electricity reached as high as 31000MWh. Even with every power plant available in Pakistan, including the most inefficient furnace oil plants (which had fuel cost of Rs 59 per unit), we could only produce about 25,000MWs. The people rightly complained of load shedding but when they were sent those high electric bills in August - the cost of fuel used in May is submitted to Nepra in June and is approved in July and sent to consumers in the July/August billing cycle—they again rightly complained.

I say rightly complained because in a properly functioning state, citizens deserve continuous supply of electricity at a reasonable rate. But given the inefficient transmission and distribution system in Pakistan, the theft, the expensive fuels and the fact that the outgoing PTI government had neither improved the efficiency nor raised base power tariffs since February 2021 while fuel cost had doubled meant that the cost of producing and distributing electricity had become exorbitant.

The government was caught in a dilemma. If we saved money in May we would leave our industry and citizens without electricity in the hot weather. And if we produced power in May the bills in July and August would be exorbitant. We weren’t going to fix the system in a few weeks and we had agreed with international financial institutions to not increase circular debt and risk the entire system collapsing.

There was a huge and justifiable outcry when August electric bills were received by consumers. I was in Qatar when the PM called me and asked me to find a way to give middle- and low-income consumers a break from those bills. I spoke to the power ministry and our development partners and came up with a plan to defer the fuel adjustment part of the bills for the low-income consumers only. The PM wanted these waived off completely but I requested him to only defer it and waive it only when we found room in the budget. The PM and I had a fundamental understanding that before we do any additional expenditures or give any tax break, we will find fiscal space. We were not going to increase our unfunded expenditures and deficits as past governments had done and which had kept Pakistan going to the IMF repeatedly. We were going to run Pakistan with greater fiscal responsibility than had been hitherto done.

This is the same reason we temporarily put in semi-formal import restrictions. The idea was for Pakistan to live within its means. The State Bank’s margin requirements were only benefiting banks, raising costs and weren’t working. Restrictions that I had suggested to them however were curbing imports. But such restrictions create a lot of disruption in the economy and can only be used for a short period.

By mid-August, our rupee had organically recovered to 213 against the dollar from 240 and the IMF program had been streamlined. Our large oil LCs were easily being confirmed by foreign banks without my intervention and the talk of Pakistan’s default internationally had died down. Even our 2022 bonds were trading at 96% of the face value. But then we raised petrol prices and there was a public disagreement about it. This created uncertainty in the forex and stock markets. And then the floods happened.

Mian Shehbaz, whose heart is in the right place, wanted to give Rs 50,000 to each of the 4 million families affected by the floods. I could only manage Rs 25,000. This still meant Rs 70 billion but the prudent businessman in me had kept money in the budget for just such a natural calamity. In addition, we gave considerable funds to NDMA for food rations, tents, mosquito nets, logistics, etc.

In spite of the huge flood loss, we had done enough to ensure Pakistan would be able to weather this devastation. We were trying to create export bias in Pakistan to reach $35 billion of exports and less than $70 billion in imports this year.

Mian Shehbaz Sharif knew even before he became prime minister that he would have to make seriously hard choices. The choice before him was clear: save Pakistan from default or worry about his political capital. He made the right choice. And even as I have been removed as minister, I hope and expect that he will continue to make the right choice. This is not a favour to this nation. This is what all of us owe our homeland.

Copyright Business Recorder, 2022

Miftah Ismail

The writer is a former minister of finance

Comments

Comments are closed.

Haroon Oct 11, 2022 01:25pm
Thank you for your service, Dr Ismail. I will only be voting next year if you return as Finance Minister. We need people like you in top jobs. You will be dearly missed.
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MalikSaabSays Oct 11, 2022 03:11pm
You forgot to mention key points: 1. You were the voice criticizing the PTI government for raising petrol prices, but here you hold PTI govt responsible for capping them (which countries around the world are doing now to save their economies). 2. It was your PM Shehbaz who as CM Punjab in his tenure brokered those expensive power purchase agreements such as Quaid-e-Azam solar park, and the imported LNG and coal plants which are giving us the circular debt and the current account deficit crisis you speak of. Truth is inconvenient isn't it? 3. You made all the easy decisions because it's easy to issue a one line notification for raise of petrol prices or electricity prices, but much more work is required to arrange cheaper fuel from international markets, or improve the billing system of electricity distributors. No Sir, you took the easy ways; the structural issues all still remain.
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Az_Iz Oct 11, 2022 05:32pm
You and this government took tough decisions under the circumstances. You deserve credit for it. Those who respect financial discipline agree with your decisions. Putting the well being of the country is more important than gaining political capital.
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Az_Iz Oct 11, 2022 05:43pm
Raising fuel prices was very unpopular, but the right thing to do. A low income country simply cannot subsidize fuel like it was being done.
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muftikhalid Oct 11, 2022 07:18pm
We the common man suffer on the hands of various political leadership. But for how long. What if we try to change the system. It is undoubtedly a difficult task however if a referendum is planned and a choice is given to the people perhaps it could change the fate of this country.
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Muneeb Oct 11, 2022 07:56pm
Dr. Sahab the masses may never understand the precariousness we were in and the citizens thank you for your efforts. Don't let criticisms from people who can't back them up with data err you from serving your nation to the best.
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GM Oct 11, 2022 09:48pm
Thanks Miftah. All we can do is educate them. They may or may not learn.
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Shayan Khan Oct 11, 2022 10:15pm
All i want to say is thank you! Hope to see you as FM next year
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Zaheer Khan Oct 11, 2022 10:34pm
Thank you Miftah for saving Pakistan from becoming a failed state, you were the best finance Minister Pakistan ever had..
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Muhammad Faiq Oct 12, 2022 01:27am
Hats off for you Miftah. You did a wonderful job. The biggest menace this Pakistan is facing right now is Imran Khan who could go to any length for saving his politics. No matter how much he hurts this country economically or internationally. But being a pmln supoorter and its sympathizer, I hope that party come out of his family-styled politics and give chances to people like you otherwise IK will keep on cashing this moment and people are dumb enough to believe in him.
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Eagle Oct 12, 2022 01:36am
Thumbs up
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Omair Oct 12, 2022 06:31am
You came in power in April, why did you keep the Petrol prices same till June 30th? Plus your indecision and mixed signals in the market gave not only shortages in supplies (ask Agri sector) but also major instability and speculations to USD. It’s amazing how it shot up from 178 to 240 in such a short span. Your tenure would be known as “headless chicken” FM and that is why you were replaced.
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Truthisbitter813 Oct 12, 2022 11:08am
You did your job well Miftah sb! Salute to your bravery!
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Imran Sheikh Oct 12, 2022 02:15pm
@Haroon, Anyone who says Shahbaz Sharif's heart is in the right place is not worth considering for any responsible position. The embezzlement, the abuse of power, the money laundering, the desire to regain power to dismantle an already precarious justice system to secure acquittals in cast-iron cases against him, appointing a criminal as Interior Minister so he can abuse State power to attack protestors exercising their Cobstitutional right only to save both their skins in the Model Town case, etc.etc. seems to all be acceptable. This man has no moral compass at all.
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Manzoor Ahmad Oct 12, 2022 02:29pm
You did a great job in saving us from sure default. You were one of the best finance ministers we had for a long time.
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Ammar Ahmed Oct 12, 2022 09:08pm
@MalikSaabSays, Khan has made such a divide in the nation that we can't appreciate anything that goes against Khan. It's a pity that we had leaders who create polarity of this magnitude.
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Abid Oct 13, 2022 07:52am
The type of indiscriminate and unjust taxes you have implemented on salaried class totally shows how unintelligent were you. Salaried class tax contribution is very small as compared to business class or indirect taxation … but you decided to apply indicriminate taxation on all segments and now will face the wrath of voters in election. Instead of increasing tax net snd bringing reforms in FBR you have shifted the weight of uour incompetence on common people of Pakistan, specially middle class.You dont worry about because army will fix those elections for you. Writing articles in financial news sites to improve your credibility as a financial expert wont serve us much. Maybe you are better off selling candies.
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Cassim Oct 13, 2022 11:42am
Thanks to you LSM slumped and I am out of job. You did great job in widening the C/A deficit by decreasing exports and improving imports. Declining foreign reserves. High inflation.
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Muhammad Usman Oct 14, 2022 02:16pm
You did a very good job brave man
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Shakeel Ahmad Oct 15, 2022 12:56am
I think you have done a good job. Undoubtedly there were not enough good choices in that situation. I appreciate your work and so do those who understand what constraints you were facing. However the rising inflation brought the public displeasure which is bound to happen in a resource depleted economy.
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Sohail Oct 15, 2022 07:26am
Good work done. Anyone who has to take care of finances can see what you are doing and why you are doing.
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