Expectations are extremely high with the appointment of Muhammad Aurangzeb as finance minister on 11 March 2024 – a position that he was reportedly offered even during the caretaker setup but which he was unable or unwilling to accept at the time.
The question is if he can deliver where his six predecessors since August 2008 (not including those who were appointed as an interim measure) failed as the economic impasse has only deepened since: Hafeez Sheikh and Shaukat Tareen served two terms under ideologically different administrations, Asad Umar was in the position for around 8 months, Miftah Ismail twice and only when Ishaq Dar chose not to take up the position, and Shamshad Akhtar served two caretaker terms.
There is one major difference between the incumbent and his predecessors – this is not a reference to the obvious one notably that this is the first time Aurangzeb has held the finance portfolio - but that he brings to the table a depth of experience in the field of investment banking that is required to take the agenda of the stakeholders forward which is to turn the economy around primarily through a focus on luring foreign direct investment (FDI). This synchronicity will guarantee his full support by members of the apex committee of the Special Investment Facilitation Council (SIFC) that would be chaired by Prime Minister Shehbaz Sharif (who notified its establishment on 17 June 2023) and attended by the Chief of Army Staff.
The question then is whether this over-arching reliance on foreign investment inflows is appropriate in economic terms? Coordinated Direct Investment Survey (CDIS) (cited in an International Monetary Fund blog dated 21 December 2021) ranked the world’s top ten recipients of FDI end-2020: the United States, the Netherlands, Luxembourg, China, the United Kingdom, Hong Kong, Singapore, Switzerland, Ireland and Germany.
The FDI Confidence Index 2023 (calculated as a weighted average of the number of high, medium and low responses to questions regarding the likelihood of making a direct investment in the market over the next three years with values on a 0 to 3 scale – three being the highest) compiled by Statista which claims insights and facts across 170 industries and 150 plus countries found a correlation between the US as the highest recipient of FDI with the highest score on the confidence index of 2.3 but this correlation did not apply to other FDI recipients perhaps because of changes between the 2020 CDIS data versus the Statista confidence index dated three years later.
The Confidence Index 2023 ranked countries after the US as follows: Canada at 2.21, Japan 2.07, Germany 2.05, UK 2.04, France 2.03, China 1.9, Hong Kong 1.9, Spain 1.89, Singapore 1.87, Switzerland 1.83. India was the only South Asian country that featured at 1.74 while three of the countries from where Pakistan expects FDI inflows ranked high on the confidence index: UAE at 1.72 Qatar 1.69, Saudi Arabia 1.66.
Pakistan did not merit a ranking with inconsequential FDI inflows to date. As per the February 2024 Outlook and Update Pakistan’s total foreign investment July-January 2024 was a very low 785.9 million dollars while portfolio investment was a low of 96.5 million dollars even though the discount rate was an attractive high of 22 percent.
Unlike Pakistan none of the countries that ranked high as recipients with a high confidence index is on an IMF programme, none of them face a current account deficit that is manageable only through incurring debt, and none of these countries face any political uncertainty. However, this does not imply that the situation cannot change dramatically though perhaps not overnight.
Be that as it may, the stakeholders are extremely optimistic that this time around the 20 to 25 billion dollar FDI by friendly Muslim countries - Saudi Arabia, the UAE though a little less so Qatar – pledged to previous administrations would be imminently realized. However, its imminence may be at a fiscal or monetary cost to the country that may include a demand for lower or zero taxes for a period, pricing of the product that would be payable by the general consumers, and full repatriation of profits which may delay the benefits associated with the FDI in terms of foreign exchange reserves and the balance of payment. There is no doubt that Muhammad Aurangzeb with a life time experience in investment banking may be able to look for any pitfalls in a binding contract (to date no binding contracts have been signed) yet one would hope that lessons have been learned from the past and the team includes a seasoned lawyer to carefully review the fine print and an econometrist able to use statistics and mathematics to study, model and predict economic outcomes.
Aurangzeb during his interactions with the media has also supported public-private partnerships in the infrastructure sector – a policy associated with Pakistan People’s Party agenda and not the PML-N. The success of public-private partnership as well as the success of privatization policy would be contingent on the state of the economy and, unlike in the past, one would hope a detailed cost benefit analysis is carried out before each sale. Pakistani public continues to suffer considerably from contracts signed with the Independent Power Producers (IPPs) because the contracts allowed for capacity payments, and repatriation of profits which has implied ever rising tariffs to meet donors’ condition of full cost recovery. One would hope that the policy that has compelled administrations to budget hundreds of billions of rupees to the privatized K-Electric each year under the head of tariff equalization (in the current year 171 billion rupees has been budgeted for K-Electric) may be revisited prior to taking a decision on sale of distribution companies. Subsidies at the taxpayers’ expense after a company has been privatized would defeat the purpose of the sale.
Aurangzeb also rightly emphasized that he would implement identified reforms (power and tax sectors) that have been long-standing demand of multilaterals and bilateral, arguing that these reforms would be in Pakistan’s interests. This was what many previous finance ministers pledged at the start of their term and failed to deliver due to political considerations however one would hope that Aurangzeb delivers where his predecessors failed. However, an inordinate focus on revenue (tax to GDP ratio) like his predecessors must be concurrent with a massive slash in expenditure, which none of his predecessors focused on.
The Prime Minister has already set up a committee to identify austerity measures that can reduce expenditure but has barred defense and mark-up from the purview of the committee. One would hope that Aurangzeb realizes that if he has to bring the public to his side he must reverse inflationary pressures that have reached a high, pressures that could well spill out on the streets with the distinct possibility of negating many aspects of his reform agenda.
It is unlikely that the IMF will allow a phased approach to meeting IMF’s full cost recovery objective (which means little relief to the public on utility rates) however it must not, as in the past, lead to higher subsidies (as appears to be taking place in Punjab today). Instead Aurangzeb must proactively cut down the budget deficit, a highly inflationary policy by (i) desisting from irresponsible domestic borrowing of which all previous finance ministers must be held to account, including Shamshad Akhtar; (ii) engage with all, barring none, recipients of current expenditure seeking voluntary cuts for a year or two till the economy stabilises; (iii) as he has noted in his interviews to limit the flow of rupees in the economy backing non-productive activities by the government, those who do not file returns and the smugglers; and (iv) to desist from frequent public interaction as a finance minister’s statements impact on expectations that rule the markets.
Copyright Business Recorder, 2024
Comments
Comments are closed.