Economic agenda: Pakistan will continue walking on a tightrope

After months of political volatility in Pakistan, the dust finally settled over the formation of a new government. A 19-member Shehbaz Sharif-led federal cabinet took oath but a change was made soon enough.

However, among those tasked to run affairs of the country was career banker Muhammad Aurangzeb. His choice emerged as the most-talked about in an otherwise recognisable coalition government cabinet.

And why not? His appointment to arguably the most crucial slot in the South Asian country comes at a crucial time for the country with negotiations with the International Monetary Fund (IMF) ongoing.

His appointment ended intense speculation, and also ended Ishaq Dar’s stint as finance minister whenever the PML-N has been incharge of running the centre.

Aurangzeb – who in his last job was running Pakistan’s largest commercial bank i.e. Habib Bank Limited (HBL) under whose leadership the corporate entity posted record gains – is no novice when it comes to the economic issues prevailing in the country.

The Wharton School graduate comes with notable achievements under his belt, which includes holding key positions in global institutions i.e. JP Morgan’s Global Corporate Bank, ABN AMRO and exclusive membership of the Global CEO Council organized by WSJ / DowJones group.

However, despite posting strong credentials, the newly elected Finance Minister must be aware that operating in the corporate world and running a country’s affairs are two different ball games. His decisions could now make or break a nation. It is no longer about pleasing just shareholders and depositors, but a nation of over 240 million that has grappled with high inflation, low growth, and massive economic uncertainty.

Shaukat Aziz and Shaukat Tarin, two successful bankers turned finance ministers, had their own share of hits and misses during their respective tenures.

This time around, the finance minister would have a lot on his plate, but no one will deny that the two tasks that should be on top of the agenda are to negotiate – after the final review of the Stand-By Arrangement – a new programme with the International Monetary Fund (IMF) and preparing the budget for the next fiscal year.

“The new finance minister of Pakistan faces two critical, interlinked tasks, i.e. concluding the current IMF Stand-By Arrangement (SBA) and negotiating a new, longer-term IMF program,” Amreen Soorani, Head of Research at JS Global, told Business Recorder when asked about priorities.

Last year, Pakistan averted a sovereign default by securing a last-minute SBA with the IMF, under which the lender was to provide $3 billion in tranches.

The agreement is set to expire in April and experts have been calling for a new long-term deal with the Washington-based lender.

“Unlocking further financial assistance from the IMF would maintain Pakistan’s access to international financial markets,” said Soorani.

“A longer programme duration would offer stability and predictability for implementing economic reforms, while the size of the programme would directly impact the resources available to address external balance issues as our import cover is still below two months,” she added.

The IMF also has expressed its willingness to engage with the newly elected government to “support the formulation of a new medium-term economic programme”.

On the other hand, Aurangzeb seems to have an understanding on the importance of getting the international lender on board and is also eager to negotiate a larger and the longer Extended Fund Facility (EFF).

However, the government would need to tread a fine line between meeting the IMF demands and maintaining economic stability.

“For example, if the government eases import restrictions, in its bid to accommodate the international lender’s demands, this may lead to pressure on the current account and the currency,” said Sana Tawfik, analyst at brokerage house Arif Habib Limited.

Meanwhile, concerns remain high over a bulging debt profile of Pakistan, while the country’s foreign exchange reserves remain relatively low, despite the government measures to keep the current account in check.

The Pakistani rupee, which has stabilized in recent months after the authorities initiated a crackdown against illegal exchanges and currency hoarders, remains vulnerable to shocks.

Meanwhile, apart from dealing with the IMF, preparing a budget is key.

“It would be important to align the federal budget with the IMF’s recommendations for securing programme approval,” said Soorani. “These may involve measures like fiscal consolidation and structural reforms, especially in the energy sector,” she added.

What measures the government takes to enhance its low tax base would be key as Pakistan has historically struggled in this area.

“The upcoming budget will not be a popular one as the primary concern of the government would be increasing tax revenue,” said Tawfik.

“The government may resort to imposing further taxes on the banking sector, which has remained quite profitable. GST could be increased on POL and other products,” she added.

But what about the untaxed sectors including agriculture and real estate? Will the new government be able to bring them into the tax net?

Aurangzeb has already advocated for expanding the tax net “and bring in retail and real estate etc”.

However, will the former banker be able to materialise words into action? Only time will tell.

The article does not necessarily reflect the opinion of Business Recorder or its owners