For the first time in country's history, the IMF programme (2013-16) was successfully completed. Surprisingly, it was under a democratic government. In its statement dated 28-9-2018, after approval of the 12th and final Review by the Board of Executive Directors, the IMF management had this to say:
"Pakistan's Fund-supported programme has helped the country restore macroeconomic stability, reduce vulnerabilities, and make progress in tackling key structural challenges. Economic growth has gradually increased and inflation has declined. External buffers have been bolstered, financial sector resilience has been reinforced, and the fiscal deficit has been reduced, while social safety nets have been strengthened. Tax policy and administration reforms allowed for further revenue mobilization. Steps have been taken to strengthen the State Bank of Pakistan's autonomy. Energy sector reform allowed a reduction of power outages, energy subsidies, and accumulation of power sector arrears. A country-wide strategy to improve the business climate was adopted."
There can be no better certification on the health of the economy. On its back, when the country issued a new 5-year Sukuk it was significantly oversubscribed and fetched the best price of 5.25%, in its tenure, and the reserves rose to $24.5 billion on 1-10-2016. There was no indication, until the end of 2016, that the Government had any plans not to build on the gains made under the programme. The Fund statement had warned that "significant challenges remain for Pakistan in the post-programme period, and the authorities' commitment to continue implementing strong policies to reinforce macroeconomic stability gains and advance growth-supporting reforms is to be commended. In light of the significant public debt burden, the authorities' plan to further reduce the fiscal deficit is welcome. The 2016-17 budget, and the revised fiscal responsibility framework can anchor fiscal policy in support of further gradual fiscal consolidation".
It was in this context that the Finance Minister Dar, after seeing some unusual movements in the exchange rate in November 2016, held talks with the exchange companies and money changers and urged them to apply restrain in speculative activities and stabilize the rate. When these efforts failed, his attention focused on the foreign currency accounts (FCAs) and its ill effects. He directed State Bank to undertake an exercise of how much forex was remitted from the FCAs in the last few years. He was shocked when informed that as much as $6 billion were remitted only during the year. He was then determined to remove the protection available to FCAs under the economic reforms act so to contain its destabilization effects. However, he was not successful in doing so.
This was perhaps the point when government's focus on economic management shifted. The matters connected with the Panama Papers and the Dawn Leaks occupied greater attention. The FBR revenue collections were recorded at 8%, sharply less than about 20% annual growth in the previous three years. Non-tax revenues also slumped and provincial surplus turned negative. Consequently, the budget deficit shot up to 5.8%, a complete about-turn in fiscal discipline. This would have been much larger but for the revenues collected from special measures of selling printing press to SBP and one of the two LNG-based power plants to Pakistan Development Fund. Despite this setback, he signaled continued fiscal adjustment by giving a budget that stipulated a deficit of 4.1%. He would not get a chance to work through this budget, however.
In the meanwhile, the reserves kept depleting as the desire to maintain exchange rate stability was irresistible. By end June 2017, reserves declined by nearly $4 billion despite contract foreign loans of nearly $4. In early July, when the SBP made an exchange rate adjustment at its own, it was viewed with immense displeasure. Then on 28 July 2018, the Supreme Court verdict on disqualification came which also ordered a reference against the Finance Minister. The new Prime Minister, on the other hand, wanted to play an active role in economic management. Mr. Dar lost chairmanships of key decision-making forums such as economic coordination committee (ECC), executive committee of national economic council (ECNEC) and was even excluded from the composition of cabinet committee on privatization. In November 2017, Mr. Dar left Pakistan and afterward the Finance portfolio effectively transferred to the PM. In December, the government appointed Dr Miftah Ismail, as Advisor on Finance.
This new combination of economic managers was indifferent to fiscal and monetary discipline and continued need for structural reforms. Although the information on the state of economy was slow to emerge but when it finally came the damage was massive. The fiscal deficit rose to 7.1%, which is unprecedented in recent history. A staggering Rs 1 trillion were overspent relative to the budget target of Rs 1.5 trillion. Tax collections showed a paltry growth of 8%, second year running. Provincial surplus again washed away. Reserves were down by $6 billion and new loans of about $10 billion were contracted. A number of administered prices (electricity and gas) were frozen, circular debt kept rising and structural reforms were abandoned.
The government debt market was completely disrupted. An unrealistic policy rate was maintained for nearly three years. For one year, Government stopped issuing Pakistan Investment Bonds (PIBs) for fear of interest rate hike. Even maturing bonds were funded through treasury bills (TBs). More than half the domestic debt is now in TBs and that too in three months, the lowest maturity in TBs. The refinancing risks have multiplied. Another casualty of indiscipline was the limit on Government borrowings from SBP. It was so phenomenal that at one time during the year, government debt to SBP rose from Rs 1400 billion in June 2016 to Rs 4800 billion, an increase of nearly four times.
A final act of imprudence was to present the budget for 2018-19, knowing well that would be the sixth budget and that it was related to a period when the PML (N) Government would not be in office. What is more, the Government showered a great deal of tax concessions which were neither demanded by the beneficiaries nor warranted given the poor tax collection performance. The individual tax rate was reduced from 35% to 15% and the taxable income was increased three-fold from Rs 400,000 to Rs 1,200,000. The combined cost of these measures is estimated in the range of Rs 100-150 billion.
All these developments eventually led to a panic in the ranks of the economic managers. Four exchange rate adjustments were effected during the period December to July. The last two were done by the Caretakers, who were otherwise expressing their inability to play an active role on the job except routine matters because the Election Act, 2017 has constrained their space.
This is a brief sketch of how we not only squandered the gains under the programme but have pushed the country back to where it started from in June 2013. Clearly, we disregarded the post-programme advice of the Fund and drifted in a direction opposite to the one that was in the interest of prudent economic management. Those who wonder why we end up going to the Fund repeatedly should be able to appreciate that it is all due to the poor choices our policymakers have made and keep making after frequent intervals.
(The writer is former finance secretary)
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