The blame game for the prevailing deep economic crisis continues with only one out of the three national parties, Pakistan People’s Party (PPP), playing a relatively passive role in contributing to the narrative given that all post 9 April 2022 relevant appointments/portfolios have been made/retained by Pakistan Muslim League-Nawaz (PML-N).
Former Prime Minister Imran Khan since 2018 has consistently accused previous civilian administrations of corruption, nepotism and incompetence and rightly holds them responsible for the 20 billion dollar highest-ever current account deficit that his administration inherited.
He further does not tire of pointing out that PPP and PML-N ruled this country intermittently for more than twenty years while his government was in power for three years and seven months and therefore their contribution to the current economic impasse is theirs alone.
The recent return salvo was hurled by Finance Minister Ishaq Dar during the tabling of the mini-budget on 15 February that envisaged additional revenue measures of 170 billion rupees, a prior condition set by the International Monetary Fund (IMF) mission for submission of its recommendation to its Board for approval of the disbursement of the next tranche.
The government had received the Memorandum of Economic and Financial Policies (MEFP) on 10 February as noted by Dar during his press conference the same day during which he also engaged in the by now usual Imran Khan bashing.
The question is who cost the economy more? Imran Khan or the incumbent economic team leaders?
Imran Khan has been rightly blamed for the 28 February 2022 unfunded relief package in defiance of the letter and spirit of the sixth review agreement his administration signed with the IMF (dated late January 2022) – a package that reduced electricity tariffs and put a cap on petroleum prices effective till the end of the fiscal year (30 June 2022) even though international oil prices were on the ascendance as a consequence of the Russia-Ukraine war.
Notwithstanding the then finance minister Shaukat Tarin’s claim that he had identified the source of funding for the package the subsequent seventh/eighth IMF review remained stalled with serious negative consequences on the current account and budget deficits (the latter remained unsustainable during Khan’s entire tenure though the pandemic can be held to be a major contributory factor). Be that as it may, the package did contain domestic inflation at 12.2 percent in April 2022.
The actual cost of this package as per the budget documents 2022-23 under the sub-head ‘subsidy to domestic consumers under PDC claims (PM package)’ prepared by the then finance minister Miftah Ismail was estimated at 286 billion rupees in the revised estimates for 2021-22.
However, the Khan administration can only be held responsible till 9 April 2022 when the vote of no- confidence was successfully passed by parliament. It is the eleven- party coalition government that must be held responsible for continuing the package till 27 May with the residual package withdrawn on 3 June or at least for 156 billion rupees of the package given that the international oil prices continued to rise well after Imran Khan was de-seated.
The Fund’s opposition to the unfunded package and insistence on its reversal were no secret. Inexplicably, Ishaq Dar appointed on 26 September 2022 as the finance minister failed to draw any lesson from this and proceeded on 6 October to announce a 110-billion rupees unfunded electricity subsidy to exporters - a mere 20 billion rupees less than the unfunded and untargeted subsidy that Imran Khan can be held responsible for though it did benefit the poor and the lower to middle income earners.
In addition, Dar has cost the economy 1.8 billion dollars (equivalent to around 480 billion rupees at Thursday’s rupee dollar interbank rate of 266.35) in lost remittances due to his severely economically flawed policy of controlling the interbank rate without adequate foreign exchange reserves to provide cover to the local currency.
This policy led to a difference of 40 to 50 rupees between the interbank rate and the rate on offer by the illegal hundi/hawala system – an activity that had virtually ended due to the global lockdown but which was resurrected due to Dar’s exchange control policy. Needless to add once the genii is out of the bottle it is unlikely to be put back in and the decline in remittance inflows is likely to continue.
During his mini-budget speech Dar once again urged all parties to agree on a charter of the economy. Independent economists would shudder at the possibility of a political consensus emerging on a charter of the economy given the history of administrations implementing disastrous economic policies - Pakistan People’s Party remains supportive of the use of state owned entities as employment agencies, a major factor in their hemorrhaging, Dar’s focus on controlling the exchange rate and extending unfunded subsidies to the elite, and the Khan’s relief package.
Other factors that militate against the feasibility of a charter of the economy are: (i) no administration - not the PPP, not the PML-N and not the PTI - has implemented reforms in the power sector, accounting for the mounting circular debt that stands at 2.5 trillion rupees today.
Donor agencies rightly, from an economic perspective, focus on full cost recovery while administration after administration has opted to pass on the buck to consumers through higher tariffs (with relief envisaged to those using up to 300 units) while refraining from implementing challenging reforms designed to improve performance of the sector. Part of the problem lies with the contracts signed with the Independent Power Producers (IPPs) that allow capacity payments in dollars with 100 repatriation allowed.
The Khan administration successfully negotiated with IPPs set up under 1994 and 2022 power policy though their impact on reducing tariffs was estimated to be under 50 paisa per unit and that too not immediately. Those IPPs set up under the umbrella of China Pakistan Economic Corridor during 2013-17 with similar contracts have so far refused to renegotiate; (ii) tax reforms remain pending as evident in the mini-budget and the focus remains on raising revenue, with rising reliance on the low- hanging fruit – on existing tax payers and on indirect taxes whose incidence is greater on the poor than on the rich; (iii) periodic amnesty schemes, with even Imran Khan, a vehement opponent when not in government, extending the scheme launched by Shahid Khaqan Abbassi’s government as well as announcing two other amnesty schemes (one specific to the construction industry) during his short period of rule; (iv) relying on borrowing – domestically and externally to fund the massive rise in expenditure each year – current as opposed to development expenditure with the latter slashed mercilessly most years to meet the budget deficit targets especially if the country is on an IMF programme; and (v) elite capture continues with respect to revenue measures and expenditure priorities.
Negative growth is projected for the current year with obvious repercussions on unemployment, falling foreign exchange reserves (projected to be shored up by even more borrowing from abroad – be it concessional or from the commercial banking sector abroad) and last but not least an unsustainable budget deficit fueling inflation.
And 85 percent of the cost of the IMF programme is to be borne by the general public with elite capture of resources sustained.
The government appears to be blithely unaware of the rising anger of the general public labouring under headline inflation of 27 percent, with food inflation well into the mid-30 percent range. The prospect of spontaneous public anger spilling onto the streets, with or without leadership, is therefore rising as the economic team leaders continue to push the buck for their own flawed policies onto the general public.
Copyright Business Recorder, 2023
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