The federal finance minister, Ishaq Dar, while chairing a meeting of the Economic Advisory Council (EAC) stated that the economy is in a comfort zone. His reasons included over-subscription of the Eurobond, successful auction for 3G/4G licences and the international confidence in Pakistan reflected by considerable pledges by bilaterals (particularly China) and multilaterals to enhance their financial support.
The issuance of the Eurobond was considered by the PPP-led coalition government year after year - a fact reflected by the projected revenue stream from this source in the budgets. The bonds, however, could not be launched for two reasons: (i) the International Monetary Fund suspended the November 2008-approved 7.2 billion dollar Stand-By Arrangement (SBA) in 2010 due to the sustained failure of the government to implement power sector and revenue reforms; and (ii) the international as well as domestic investment climate remained poor.
Since Dar has assumed the Finance portfolio, it is relevant to note that Pakistan opted for another 6.64 billion dollar IMF programme that was approved in September 2013 with the commitment to implement the stalled power sector and tax reforms. Going on an IMF programme gives investors the confidence that the government has embarked on a reform agenda and that there is a monitor to ensure the implementation of these reforms. This may partly explain the inflow of foreign pledges for development of our infrastructure sector. Be that as it may, much needs to be undertaken to satisfy the Fund staff as revealed after the completion of the third quarterly review. At the joint Ishaq Dar-Jeffrey Franks (IMF team leader) press conference, Franks stated that the government has committed to reducing subsidies by about 0.4 percent of Gross Domestic Product (around 105 billion rupees), and increase tariffs to generate another 105 billion rupees. The Fund, he added, agreed to revise the revenue targets downward after the government pledged to end the statutory regulatory orders (SROs) in a phased manner as well as increasing the audit from 3 to 5 percent. These are politically challenging pledges and one hopes that the Finance Minister can deliver as the economy does require a major surgery with respect to these sectors.
There is, however, no doubt that part of investor confidence is sourced to Prime Minister Nawaz Sharif's policies during his previous as well as current stint in power that are widely perceived as business-friendly, pro-private sector and with annual development outlay focused on infrastructure sectors particularly roads and energy. His personal relations with some countries, notably Saudi Arabia from where the 1.5 billion dollar "gift" reportedly emanated which fuelled the perception that the Saudis are looking towards Pakistan to meet their regional objectives, as well as China that pledged 35 billion dollars in five years and Turkey, account for the massive bilateral and multilateral pledges.
Dar's critics, however, argue that the over-subscription of the Eurobond was premised on the fact that we are in an IMF programme, have never defaulted, as well as the high rate of return - 7.5 percent for five-year bond, and 8.5 percent for 10-year bond. The considerably more indebted Greece with Caa3 rating - two notches below Pakistan - raised a euro-equivalent of $4.2 billion from its five-year issue at 4.75 percent.
Dar's claim of the successful auction for 3G/4G within a year of taking over the government is a major achievement especially when viewed in the context of the failure, year after year, of the PPP-led coalition government to follow due process and complete the auction.
The increased foreign pledges for infrastructure development, if they materialise, would lead to an enhanced economic activity and therefore need to be supported. The pledges by multilaterals, particularly the World Bank, are as yet notional and their materialisation would depend on our absorption capacity that remains low.
There has been a considerable jugglery of economic data especially with reference to release of quarterly data for which the Federal Bureau of Statistics (FBS) lacks adequate expertise. Parliamentarians as well as economists have argued in favour of Dar making the Federal Bureau of Statistics independent of his ministry as well as granting autonomy to the State Bank of Pakistan in letter and spirit; however, the status quo remains. This has effectively implied heavy borrowing from the SBP and/or intervention in the currency market that continues to fuel inflation. Franks recently expressed concern over the rise in inflation. In this context, it is also relevant to note that any rise in power tariffs that Dar has committed to the IMF would further erode the value of each rupee earned with obvious negative socio-economic implications. Thus Dar's claim that the economy is in a comfort zone would, one hopes, not be taken to be synonymous with the economy being out of the woods yet. There is a long way to go yet!
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