The Deputy Prime Minister and Foreign Minister, Ishaq Dar, labelled delays in the International Monetary Fund’s (IMF’s) disbursements under agreed loans as “sabotage”. “I was in the last government for eleven months and reviews kept going on…. My assessment is they wanted Pakistan to default. Our politicians should be wary of this - we are a nuclear state.
Every time we go into that direction (of economic success) our legs are pulled. (The disbursement) was delayed for eight months and that, in the economic life of a country is a big crime.” He then proceeded to compare 2013 to 2017 on the “growth trajectory during Nawaz Sharif’s administration” restating that the country was referred to as the 24th largest economy in the world.
Nawaz Sharif, the undisputed PML-N leader, since his return from London on 22 October 2023 till-date, during his increasingly rare public appearances, has reiterated Dar’s claim of a fall in the country’s position from being the 24th largest economy in the world to the current much lower level.
The fault, the two men and party stalwarts never tire of pointing out, can be laid at the disastrous policies of the Khan administration – August 2018 to early April 2019. The question is if this claim is warranted.
The 24 position in 2017 was with respect to purchasing power parity (PPP) and in that year Pakistan was 46th in terms of nominal Gross Domestic Product (GDP) comparison.
PPP is defined as the rate of currency conversion that equalizes the purchasing power of different currencies by eliminating the differences in prices between countries.
In this context it is relevant to note that Ishaq Dar was engaged in artificially keeping the rupee-dollar parity constant which, in turn, accounted for the largest ever current account deficit that the country faced in 2018 – a whopping 20 billion dollars.
The exchange correction began during the PML-N government led by Shahid Khaqan Abbassi with Miftah Ismail as the finance minister, a correction that continued during the tenure of the Khan administration, is currently in place, but was abandoned from 28 September 2022 till the cabinet was dissolved on 11 August 2023 - the period of the fourth tenure of Dar as the Finance Minister, though his effective control over policy ended on 22 June 2023 when the then Prime Minister Shehbaz Sharif met with Kristalina Georgieva, Managing Director of the IMF on the sidelines of a summit in Paris.
Data from the World Bank reveals that in 2023 Pakistan was still in the 24 position with respect to PPP and this position was achieved without interference in the exchange market – no doubt preferable to the 2017 position.
Nominal GDP in 2017 was 339.2 billion dollars which declined to 356.2 billion dollars the next year (Shahid Khaqan Abbasi’s tenure ended 1 April 2018, replaced by the caretaker government in place till late August the same year) and to 320.4 billion dollars by 2020 – a decline mainly if not entirely due to the pandemic.
Nominal GDP rose to 348.5 billion dollars by 2021 and dipped to 374.7 billion dollars in 2022, the year that witnessed a growth of nearly 6 percent to the surprise of the then cabinet members and plummeted to 338.2 billion dollars in 2023, the year of the PML-N led government.
Dar and Nawaz both frequently cite prices of essential items in 2017 – onions, atta, sugar, rice, meat, chicken - and contrast it with prices today. This comparison is inexplicable because prices do rise and therefore such a comparison is economically inappropriate.
And secondly; CPI was 11 percent in 2021-22 (the PTI administration terminated during the first week of April 2022) rising to 22.2 in 2022-23 when the PML-N led administration was in office with Dar as finance minister from late September 2022to the end of his effective control when the fund reached a staff level on the Stand-by arrangement in June 2023.
In Pakistan there is also a need to consider two further elements while comparing the price of essentials over time.
First, indirect taxation whose incidence on the poor is greater than on the rich, have been rising with time. This includes petroleum products defined as the low-hanging fruit that have been subjected to a rising petroleum levy over time and in the current finance bill this levy was raised to 70 rupees per litre (though not yet implemented) - a cost that has to be factored into transporting essentials from farm to market and for imported items from ports to the markets.
And second is the significant rise in the price of utilities, defined as factors of production, due to administrative decisions taken on the advice of the International Monetary Fund (IMF). Thus with a rise in input costs the rise in the general price level, including the price of essentials, is a given.
Dar may point out that Pakistan successfully completed the Fund programme from 2013 to 2016 but he needs reminding that the IMF design he agreed to in 2013 was flawed on three counts: (i) tax reforms were focused on raising collections rather than on making the structure more equitable, fair and non-anomalous; (ii) current expenditure was increased each year to appease the elite stakeholders, which was increasingly funded by borrowings from bilaterals/multilaterals and commercial banking sector (at higher rates of return) as well as domestic borrowing with negative implications on inflation; and (iii) passing on the onus of reforms of the poorly performing sectors on the general public - factors that account for 41 percent poverty levels in Pakistan today.
Without the IMF uploading the documents relating to the staff level agreement reached on the Extended Fund Facility programme on its website, an exercise which is subsequent to Board approval that remains pending, recent fiscal and monetary policy decisions indicate that the government has agreed to the same flawed IMF programme design and that is concerning.
It is also patently evident that without the Fund programme pledged assistance from bilaterals will not be forthcoming which would compromise the government’s capacity to meet its foreign debt payments that, in turn, would bring the prospect of default closer.
In this scenario for Dar who no longer has the Finance portfolio, to alienate IMF staff by accusing them of sabotage, requires prompt and proactive attention.
To conclude, what is concerning is that the current team of economic managers has agreed to the same flawed IMF design as their predecessors – a design that clearly has not worked given that the EFF pending board approval well be the twenty fifth loan.
One would hope for an out of the box solution that requires at least a 2 to 3 trillion rupee reduction from the budgeted current expenditure that would reduce the onus of generating the revenue target agreed with the Fund team, thereby paving the way for a phased approach to make the tax structure fair, equitable and non-anomalous.
Copyright Business Recorder, 2024
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