Has Ishaq Dar lost his magic?

Statesmanship demands maintaining a delicate balance between economy and politics. Unfortunately, the scales world over have become excessively skewed towards politics. Last week, British Prime Minister Truss announced her intention to resign after 8 weeks in office, as financial markets rejected her overly populist fiscal policies.

The majority party came up with fantastical fiscal concessions which made markets jittery, causing the currency to plummet. Within six weeks, the PM resigned, and now economic decisions are driving the politics there.

Back home, populist fiscal decisions taken by successive governments (since Feb 2022) have turned difficult exogenous circumstances into a full-blown crisis of solvency. First, the PTI (Pakistan Tehreek-e-Insaf) government deviated from the IMF (International Monetary Fund) programme and froze petroleum and electricity prices.

After the success of VoNC (vote of no-confidence), the coalition government refused to correct the balance, afraid of IK’s growing popularity. The outcome is disastrous. The country was on a verge of default. Frankenstein’s monster has been unleashed, and has now become impossible to control.

The subsidy on petroleum was Rs52 billion – from 1st March to 9th April. Overall fiscal subsidies were to the tune of Rs 954 billion in April-June 2022, major chunk was in petroleum and electricity. However, as international prices started rising abnormally, the subsidy too got out of control. Meanwhile, the political temperature kept rising as well. IMF was not happy at all. Increasingly, there were talks of default. Eventually, Pakistan returned to IMF, this time with much harsher conditions.

The finance ministry has turned into a revolving door. Four finance ministers have come and gone since May 2021. From Dr Hafeez Sheikh, Hammad Azhar, to Shaukat Tarin, Miftah Ismail and now finally, Ishaq Dar.

Ironically, IMF conditions have become tougher following every change of guard at the ministry. That’s because, with every new appointment, subsequent ministers have balked at prior sovereign commitments, trying to get away by citing “poorly negotiated terms”.

In turn, each time the IMF has returned asking for new ways to recover lost revenue. For example, the petroleum levy was supposed to be Rs30 at peak (prior to Feb 2022) but has been raised to Rs 50 since programme resumption. Now rumours suggest the IMF is insisting on imposition of GST on petroleum and other taxes to cover fiscal slippages. It increasingly appears that Dar’s magic is not working any longer.

Although shocks to global economy since the pandemic have created difficult situations, the blame for Pakistan’s currently weak macros lies fully with terrible decision making by successive governments, leading to an economic crisis today. And now this is also driving politics. The latest move was to bring Dar back to calm economic sentiments.

The finance minister’s maiden trip to Washington hasn’t yielded any winning concessions. In fact, the Fund is asking for more. Grapevine suggests government needs to remove duty ad tax exemptions on exporters, revival of earlier personal income tax proposal to include all bands, increasing value added tax (VAT) raters, taxes on captive power generation and household power generation, removal of power subsidy on tube wells for large farmers, and tariff increase in power and gas as per the agreed schedule.

These are tough decisions. Economic conditions are not favorable. In October and November, the foreign debt principal payments climbed to a whopping $6.1 billion.

Some of these will be rolled over. That is why there is no excitement in the market after good news was received on getting out of FATF (Financial Action Task Force) grey list, and $1.5 billion loan disbursement approval from ADB (Asian Development Bank). The need is much greater.

IMF review is due in November (though the government wanted it in the last week of October). Some tough decisions perhaps are required for its success. Without that, no money will be coming from the World Bank. Meanwhile, there is no progress on commitments from friendly countries either – whether Qatar, UAE or Saudi Arabia.

When Dar took over, it was said that he would negotiate with the IMF like an equal. He got nothing. He vowed to give a ‘befitting’ response to Moody’s (rating agency) for downgrading Pakistan’s rating; but all he got is a downgrade by another rating agency (Fitch).

Slowly, the reality is sinking in.

The problem with Dar (and many of his admirers) is that they are living in past. His claim of fame was the 1998 crisis and then 2013. In 1998, the country defaulted on its loans and froze the FE-25 deposits. In 2013, the PML-N went to the IMF for cheap financing. Time was different. US wanted our support in Afghanistan. The IMF gave record 18 waivers in the 2013-16 programme.

Today, the situation is entirely different. The next six months are going to be difficult. Those who think that political capital of PMLN needs to be revived by giving some economic concessions, should think twice and look at the UK again. Sanity is needed.

Copyright Business Recorder, 2022