In defence of economic policies

As pledged by the Special Assistant to the Prime Minister on Information Firdous Ashiq Awan after the cabinet meeting on Tuesday 22 May, the Advisor to the Prime Minister on Finance, Abdul Hafeez Shaikh, held a press conference on Saturday 25 May to unveil the government's long-term economic plan. There were two major deviations from this pledge. First, Shaikh was flanked by two full ministers - Energy and Planning - one minister of state - Revenue - Firdous Ashiq Awan and Chairman Federal Board of Revenue. This allowed him to refer all questions to relevant ministers who, reportedly, have not been briefed on the specific details of the staff-level agreement or in other words, the ministers focused on denigrating the poor performance of the previous administration, highlighting the Pakistan Tehreek-i-Insaaf's manifesto pledges and their own achievements.
Second, in his inimitable style, Shaikh did not reveal more than what is already known. He hinted at "very important decisions" that would set the stage for stabilisation in 2019-20 followed by recovery and onward march to growth. He did not clarify what steps were envisaged to achieve stabilisation though, as was expected after the International Monetary Fund (IMF) press release dated 12 May confirming that a staff-level agreement was reached and that the primary deficit would be reduced to 0.6 percent next fiscal year, Shaikh stated that the budget for next fiscal year envisages two elements. First, austerity measures but he did not specify which expenditures would be axed; to predict which expenditures would be curtailed one would have to look at the IMF press release that specifies "prudent spending growth aimed at preserving essential development spending, scaling up the Benazir Income Support Programme and improve targeted subsidies, with the goal of protecting the most vulnerable segments of society."
In other words, development spending would not be curtailed, unlike in the past when the deficit became unsustainable, and instead, it would be increased to 800 billion rupees as already mentioned by the Prime Minister. The civilian and the military administrations would therefore have to contribute to austerity measures, the two largest recipients of the annual budget apart from debt servicing, though here again Shaikh's clarification created greater confusion as he then acknowledged that given our security concerns all the required finances would be made available:
Second, higher revenue though here Shaikh was more specific and added that the revenue target for next year is 5.5 trillion rupees, an unconscionable rise of 1.45 trillion rupees from the revised estimates of the current year, especially given that 2019-20 would be stabilisation and not a growth year. How would this revenue target be achieved?
Shaikh placed the entire onus on the Chairman FBR though his role is recommendatory and it is the cabinet that approves the tax measures before submission to parliament. Additionally, with a growth projected at only 2.8 percent by the IMF, any increase in revenue, especially of this magnitude, would imply jacking up existing taxes; clarity in this regard is available in the IMF press release that states that to achieve the primary deficit of 0.6 percent what is required are "tax policy revenue mobilization measures to eliminate exemptions, curtail special treatments, and improve tax administration." The first two items are estimated to yield around 680 billion rupees in the ongoing year; however the government's capacity to undertake these measures would be limited as the impact on industrial output and the export-oriented sectors enjoying fiscal incentives would be significant with a consequent impact on employment.
Additionally, next year's budget may also have a large number as privatisation proceeds though one would hope that any such plan takes account of the possibility of litigation as well as of the powerful labour unions opposed to privatisation that can bring entire cities to a standstill.
Shaikh argued that inflation is mainly due to (i) the recent rise in the international price of oil (an external factor) but did not mention the sales tax on petroleum and products and the petroleum levy contributing to inflation; and (ii) the exchange rate though he did not elaborate further. The recent erosion in the rupee value, a prior condition in the staff-level agreement, would have had a major impact on the revised budget deficit estimates for the current year as the depreciation of each rupee vis-a-vis the dollar adds 105 billion rupees to our existing debt. This in turn would exacerbate the need for austerity that may be politically unfeasible.
The IMF press release indicates the acceptance of untenably harsh conditionalities by the Pakistani team leaders - Shaikh and Governor State Bank of Pakistan Reza Baqir - that are likely to have serious social implications. This raises the scepter of public acceptability of these conditions and it must be borne in mind that the Pakistani public as well as interest groups have never hesitated to express their concerns on the streets compelling much stronger governments than the present to back down.
To conclude, one would have hoped that Shaikh had appeased public concerns about the IMF deal generated by the press release however sadly the press conference raised more questions than it answered.