Heads you lose, tails I win is the axiom ostensibly used by Ishaq Dar-led Finance Ministry in all policy as well as specific technical decisions against the growing number of critics. The question is whether his claims are finding a receptive audience?
Prime Minister Nawaz Sharif in his speeches has, time and again, expressed his gratitude to Dar's handling of the economy and, subsequent to the party's successes in by-elections as well as in the recently concluded local bodies' elections in Punjab, views the economy's performance as in no way a source of political concern. The marriage between economics and politics is a fairly well-established phenomenon in the more developed economies, evident in the often repeated phrase 'it's the economy stupid,' yet in Pakistan such a marriage is still subject to an ongoing pre-nuptial negotiation for two reasons: (i) the two status quo parties who have to date formed a government in the centre and provinces namely PML-N and PPP support largely similar economic policies, including slashing development expenditure to fund unbudgeted rise in current expenditure and inability/reluctance to undertake governance/structural reforms with perhaps the only difference between the two being that PML-N does not use state-owned entities as recruitment centres for low cadre loyalists as does the PPP though the two parties' leaders appoint those loyal to them in senior positions; and (ii) a deal between the two parties to desist from proactively pursuing cases of corruption/maladministration against each other though the rangers appear to have taken a different approach with respect to Karachi.
Success in local bodies' elections is considered a function of the incumbency factor with those in administration more likely to win because they not only control the administration that supervises/monitors the elections prompting a charge of rigging by the opposition but are also better poised to deliver to their constituents. In addition, the local bodies' elections results specifically in the Punjab have shown that the local factor defined as the personal popularity of a candidate is also a key determinant of election results in some constituencies more than others. That in Punjab the two major parties PML-N and PTI selected candidates who failed to win is evident from the large number of independents who succeeded: in 12 districts of Punjab where polling was held for 2696 seats PML-N won 1192 followed by independents 1065 with PTI a distant third at 285. Independents, such is our electoral history, nine times out of ten join the ruling party to ensure that they can better deliver to their constituents.
In Sindh, the PPP swept the polls with polling in the first phase held in 8 districts with PPP securing 2700 seats and independents 300 (the constituencies where elections took place are not MQM's stronghold). No viable opposition by the two national parties namely PML-N and PTI was the reason given for the PPP win; but perhaps Asif Ali Zardari's thesis that electables continue to dominate our elections has relevance in Sindh at least. Thus the two status quo national parties won big and this in spite of serious charges levelled against their leadership of corruption, murder, mismanagement and flawed policy decisions.
The net outcome of these results is a visibly crowing Prime Minister and former President Asif Ali Zardari claiming that their party's success in the local bodies' elections is indicative of public support for their administrations' policies. The two status quo party leaders however may well be privately concerned given the proliferation of negative reports on their performance - Nawaz Sharif more so than Zardari as his support base includes cities while the PPP has been more or less wiped out of cities (where a growing linkage with performance is evident). The PML-N has been winning by an ever lower majority in by-elections in comparison to 2013 elections; and needless to add cities is where the PTI would focus on once its chairman overcomes his personal problems and, more importantly, succeeds in uniting the party.
Sharif's Finance Minister continues to cite one major achievement as indicative of the success of his policies. Foreign exchange reserves, he notes, have risen up to 20 billion dollars. As per international practice, around 5 billion dollars of this amount should not be included as the country's foreign reserves as these comprise of foreign exchange held by the private sector in commercial banks. Pervez Rashid-led Press Information Department has engaged in combing the Western media to pick out stories supportive of Dar's economic policies and to on-send them as press releases to the media. However, the PID did not on-send the most recent Bloomberg report which has reiterated the stance of independent local economists: "Pakistan's record foreign exchange reserves are masking economic weaknesses that risk pushing the nation toward more aid from the International Monetary Fund (IMF)...At least half of the country's $20 billion stockpile comprises of debt and grants, almost all of which have flowed in since Prime Minister Nawaz Sharif took office in 2013. That money could leave quickly as Pakistan begins repaying the IMF in 2016 or if oil prices surge, leading to another balance of payments crisis." This was supported by IMF's mission chief for the 6.64 billion dollar Extended Fund Facility to Pakistan, Harald Finger, who in a media interaction acknowledged that our reserves are not sustainable. A dire prognosis indeed and one would hope that it focuses the attention of the Prime Minister on the policies currently being pursued by the Finance Ministry.
As has become the norm, Dar dragged Harald Finger from Dubai where the ninth mandated quarterly review took place, and held a joint press conference with him in Islamabad. While Dar engaged in his usual praise of his own policies Finger identified four areas of weaknesses. First, a 40 billion rupee revenue shortfall from what was projected in the budget. Dar has repeatedly justified his unrealistic budgetary revenue targets by arguing that this compels the FBR to work harder; and routinely dismissed claims that the price for this inane strategy was paid by the general public through the levy of higher taxes to make good the shortfall as a pre-tranche release condition. In his media interaction a day after the joint press conference, Finger confirmed that the government would have to generate the 40 billion rupee shortfall as pre-tranche release condition.
During the press conference, Dar stated that tax collections had risen by 22 percent in October this year and failed to mention that his claims of raising the tax to Gross Domestic Product ratio as well as total tax collections can be attributed to: (i) bringing 310 billion rupees previously parked as non-tax revenue under other taxes (inclusive of gas infrastructure development cess amounting to 145 billion rupees, natural gas development surcharge accounting for 30 billion rupees and Petroleum levy accounting for 135 billion rupees); and (ii) withholding taxes collected by withholding agents and not the Federal Board of Revenue (FBR) are now around 70 percent of all direct tax collections or in other words heavier than ever reliance on indirect taxes as these taxes are passed on to the consumers while failing to reform the tax structure itself. Dar further contended that the revenue shortfall has been met partially by 23 billion rupee expenditure management - a claim that left many dissatisfied as he was unable to divulge details of this expenditure management and the consensus is that there would be a commensurate reduction in development expenditure as has been his practice as well as that of his predecessors.
Secondly, Finger stated that work was needed in restructuring and privatisation of public sector enterprises (PSEs). It is unfortunate that the government is focused on sale of shares of profit-making units (leading to lower non-tax revenue annual stream of the government) as opposed to outright sale of loss-making units subsequent to restructuring efforts (largely cosmetic) that appear to have made little dent in the continued loss-making entities notably Pakistan Steel Mills (PSM) and Pakistan International Airlines (PIA). Flawed senior appointments continue to compromise restructuring efforts and this includes the current team of the Privatisation Commission with its focus on road shows and sale of profitable PSEs to strategic investors - a strategy that is generating considerable controversy. The government would be well-advised to look at the successful sales undertaken by the telecommunications sector during its tenure and take remedial measures to not only appoint appropriately qualified individuals but focus on sale of loss-making units to minimise bailout packages, a better expenditure management focus than slashing development expenditure.
Thirdly, IMF mission chief identified investment climate as a weak area. The IMF must bear part of the blame for this as Dar's focus on deficit reduction as well as on borrowing - components of the EFF - are major factors in the worsening investment climate, poor growth and declining exports.
Finally, Finger also referred to the need for energy sector reforms - a sector grappling with governance issues highlighted in a recently released Nepra report. Dar maintained that the circular debt had been restricted to 26 billion rupees against a permissible limit of 36 billion rupees. One would do well to recall that the State Minister for Water and Power Chaudhry Abid Sher Ali informed the senate standing committee Thursday past that the circular debt had again reached 250 billion rupees. Independent sources place the figure at over 600 billion rupees.
What must the Prime Minister pray for to neutralise the political impact of his Finance Minister's economic policies? Some good news from outside the country notably continued low oil prices, high commodity prices (our major exports), higher remittances and some loan write-offs that would simply be wishful thinking. The good news would require no hiccups to the implementation of the China-Pakistan Economic Corridor. Or in other words, if domestic economic policies remain the same then Nawaz Sharif would have to rely on external factors to ensure the success of his re-election bid.
To conclude, if as is expected external factors no longer favour the economy then Sharif would need to look at the state of the economy through the eyes of independent economists. Failure to do so would no doubt lead to electoral losses in the 2018 general elections - a year forecast as one when the loans procured by the Finance Minister both from multilaterals and private sector inclusive of the sale of Eurobonds and sukuk would become due. And if the oil price begins to rise again then the economic space created would evaporate plunging the economy into a balance of payment crisis, low growth and ever rising indebtedness.
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