Self-damaging priorities

During 2016, the issue seriously damaging the regime and relevant state offices has been side-lining of the Panama Leaks; after the massive Raiwind protest over it and the protest that threatens to freeze the federal capital, rationality demanded ensuring against opening up of new Pandora's boxes. Surprisingly, that doesn't appear to be the regime's strategy.
The recent disclosures include a report in daily Dawn's Cyril Almeida about a closed-door meeting between the government and the Army top-brass, a proposal to enhance gas tariff by 36 percent (later rejected by the PM), disclosures by the AGP about massive fund misuse in some mega power projects, and FBR's refusal to provide the AGP tax records of 969 powerful entities.
Yet, on October 8, the Finance Ministry issued a statement saying that, in its annual meeting, Emerging Markets (a magazine the ministry claimed as "the newspaper of the IMF/World Bank") declared Ishaq Dar South Asia's "Finance Minister of 2016" in recognition of Pakistan's economic performance. But the claim about the magazine being an IMF/World Bank newspaper was immediately denied by the IMF.
Thereafter followed the conclusions of IMF's 12th (and final) review of progress on achieving the targets Pakistan agreed to, under IMF's $6.64bn Extended Fund Facility wherein, besides appreciation for achieving several targets, observations about the unachieved targets were significant -public debt being too high and, despite tripling over the course of the program, exchange reserves not reaching a comfortable level.
According to the IMF, the key macroeconomic targets achieved during 2013-16 were: (i) real GDP growth rate rising from 3.7 to 4.7 percent; inflation declining from 7.4 to 2.9 percent; (iii) a reduction in fiscal deficit from 8.5 percent to 4.6 percent; (iv) tax to GDP ratio rising from 10 percent to 12.4 percent; (v) subsidies on energy declining from 2 percent to 0.6 percent.
But, according to the IMF, at close to 65 percent of the GDP(or 430 percent of the revenue), total public debt is not only high but has increased by 2.5 percent of GDP over the programme period to a level well above the emerging market average, which supports the view that the economy hasn't been "stabilised". Impliedly, the key achievement of the regime is not credible.
What the IMF didn't point out in this context, though was that, instead of resolving the problems of the export sector to build genuine exchange reserves, the government is following a policy of borrowing afresh to repay its maturing debt; the only improvement in this context is that, instead of borrowing from the SBP, the government is now relying on the financial services sector.
The IMF acknowledged insufficiency of exports in relation to the GDP, but didn't point to its own estimate (Rs 133bn) of unpaid tax refunds to the export sector to under-report the fiscal deficit at the cost of escalating the miseries of this sector though it regretted the unending power load-shedding that caused a 3-year continued slide in exports - a trend that continues unabated.
The demand-supply gap in the power sector crippling the industrial sector is also forcing higher import of locally produce-able goods. Although winter is yet to unfold in full intensity, this demand-supply gap has crossed 7,000MW, while the mega and highly controversial power projects won't begin supplying electricity until 2018 - an overly depressing prospect for the entire industrial sector.
The IMF is of the view that, based on the rupee/dollar parity in 2000, real effective exchange rate of the rupee (that touched 118.34/$ in 2015-16) "experienced a pronounced appreciation over the program period and negatively impacted trade competitiveness." The IMF is of the view that the Rupee should be depreciated - as much as 20 percent - to rebuild Pakistan's trade competitiveness.
This is simply amazing because, with Pakistan's imports now more than twice its exports will depreciation of the rupee not trigger unbearable inflation that could trigger countrywide social chaos? Haven't the frustrations over maladministration of the state already made Pakistan a boiling cauldron? Does this chaos require containment or further escalation?
The expanding trade deficit foretells more external borrowing because Pakistan's image portrayed by these failures (containable if the regime shifts its focus from denying its failures to remedying them) are discouraging FDI inflows. Can foreign investors' confidence be revived by a questionable award that made Ishaq Dar South Asia's "Finance Minister of 2016"? Isn't it sheer self-delusion?
The IMF too pointed to the declining trend in private investment, especially FDI, and its insufficiency for higher economic growth and reducing unemployment (that IMF too believes is high). This implies that building exchange reserves (bulk thereof borrowed) alone won't attract FDI, but faith revival in rationality and stability of economic policies, and credibility of state administration will.
An example of how the administration is being made to realise the importance of adopting this profile is provided by the management of Public Sector Entities (PSEs). According to the IMF review, the cumulative losses of the PSEs during the 2013-16 increased from 1.7 percent of the GDP to 2.3 percent despite a minor reduction since 2014 in their annual losses.
The IMF has repeatedly pointed to the need for restructuring or divesting PSEs because many PSEs remain loss-making entities that escalate fiscal deficit by consuming scarce fiscal resources, but preference for convenience leads to imposing new taxes or increasing their existing rates that over-burden the honest tax payers because every year FBR fails to significantly expand the tax net.
According to the IMF, Structural Benchmark on privatization (ie solicitation of expressions of interests for privatising a G.E.N.C.O) though met, couldn't deliver due to labour tensions and political opposition. However, there was no comment on such initiatives in the context of Pakistan International Airlines (PIA), Pakistan Steel Mills (PSM) and Pakistan Railways (PR) - the biggest bleeding wounds.
The "restructuring" of PIA and PR (questioned on account of their rationality and cost) has burdened them with additional debt, and Pakistan State Oil has yet again threatened to stop fuel supply to PIA because of its unpaid liabilities to PSO. As for PSM, there simply has been no re-structuring of any sort. Is this how these PSEs are being prepared for privatisation?
The fact is that only after 2009 PSM became a loss-making entity because the PPP regime added as many as 4,800 workers to PSM's permanent workforce, saddling PSM with additional annual financial burden of Rs 2 billion, and despite significantly improved Pakistan-Russia relations, Moscow's offer to revamp PSM's plant and machinery (of Russian origin) continues to be ignored. The priority of PML-N regime therefore remains a million dollar question; varied examples of neglect of its obligations suggest that it is focused only on denying failures, not remedying them.