Aurangzeb has his work cut out for him

In understanding the nation’s economy, there’s a clear distinction between an economist serving as the finance minister and a commercial banker taking the helm at the exchequer. An economist in the finance ministry can focus on broad economic policy issues such as fiscal stimuli, taxes, government spending, trade policies, and long-term economic planning.

On the other hand, for economic stability a banker in the finance ministry as per his best understanding may focus more on monetary matters rather than on fiscal issue, though it’s purely the domain of Governor State Bank of Pakistan and its Monetary Policy committee.

An economist finance minister might prioritize strengthening the tax system, while focusing on achieving macroeconomic stability, fostering sustainable growth, reducing income inequality, and addressing structural economic challenges.

Pakistan’s economic woes stem from its undocumented economy, which stands almost parallel to the documented one in size. This is why, despite a population of 250 million, the overall tax-to-GDP ratio in the country struggles at a challenging 10-11 percent.

It’s primarily the undocumented economy that has kept the country from standing firmly on its feet even after 75 years, despite having seasoned economists like Mahbubul Haq, Sartaj Aziz, Abdul Hafeez Sheikh, Salman Shah, and Miftah Ismail at the helm of the finance ministry.

Conversely, after Shaukat Aziz and Shaukat Tarin, a renowned and globally acclaimed commercial banker, Mohammad Aurangzeb, has been handed the treasury’s reins. Among all these experiences, Ishaq Dar stands out as a controversial finance minister who attempted to steer the economy through gimmicks. He, for example, artificially controlled the exchange rate, a policy now viewed critically in today’s market-based economy.

The question arises: why have the treasury’s keys been handed over to a prominent commercial banker once again, and will he succeed in his efforts to stabilize the national economy? Mohammad Aurangzeb, who was the President of Pakistan’s largest bank, HBL, before taking the oath as finance minister, is said to have been selected by the establishment.

It desired to acquire the services of Sultan Ali Allana, who not only chairs HBL but is also the director of the Aga Khan Foundation. However, it was His Highness the Aga Khan’s nod that facilitated Mohammad Aurangzeb’s induction into the federal cabinet.

The establishment sought someone with strong ties to global financial institutions, especially when Pakistan was endeavouring to exit FATF’s grey list in the recent past. At that time, Sultan Allana had brought in experts who assisted the country in removal of its name from FATF’s grey list.

Now, once again, Pakistan needs negotiations with the International Monetary Fund (IMF) and other multilateral and bilateral creditors. In this scenario, Aurangzeb’s selection is considered beneficial for Pakistan. Being a professional banker, Aurangzeb brings extensive experience of working in global financial institutions.

Currently, Pakistan’s banking sector is the only business in the country that has shown consistent growth over the years. Pakistani banks are making historic profits due to high-interest rates. The government heavily relies on commercial banks for obtaining loans. This is why banks have posted 85 percent growth in profits, based on markup income in the last year alone. The newly- appointed finance minister is also talking about the same fundamental and principled priorities, which are undoubtedly in Pakistan’s interest.

They are discussing reforms in the FBR, reduction or removal of subsidies, taxation on wholesale, retail trade, real estate, and agricultural incomes.

So far, no political government has seriously attempted to bring these sectors into the tax net mainly because of the fact that these powerful people are present in the parliament or they pressurize the government through trade organizations.

Even in past, General Pervez Musharraf couldn’t tax these traders. Aurangzeb rightly says that we need to change our economic model first. We have to shift from an import-based growth to an export-oriented one. Our expenditures exceed our revenues. It means we spend $2 to earn $1.

Through an estimated 6-7 percent GDP growth, we open up our imports without any restraint, which ultimately results in unbearable pressure on forex reserves, and then we are forced to go to the IMF for yet another programme under stricter conditions than before. The IMF has once again demanded “do more”. Successful negotiations with the IMF for the next programme and the Federal Budget 2024-25 will constitute an extremely difficult task.

The IMF has emphasized ending the subsidy culture. It is unfortunate that the elite in Pakistan benefits more from subsidies than the poor. According to the UNDP report, the elite in Pakistan receive subsidies of more than $17 billion annually.

There is no doubt that Aurangzeb prioritizes national economic stability, but it is also necessary to see for how long coalition parties will stand by his side, as history shows that much needed economic decisions are always politically compromised.

Copyright Business Recorder, 2024