Truths, half truths and then...

The unchallenged legacy of Donald Trump's presidency has been an almost routine fact-check of all statements he makes. This exercise has become increasingly relevant in assessing the grandiose claims by stakeholders, including Pakistani federal ministers. The question today is how much of what Advisor to the Prime Minister on Finance Dr Hafeez Sheikh said in his maiden speech to the nineteenth parliamentary session was true, a half truth or an outright lie.

His long winded treatise on what the Khan administration inherited, largely accurate, was a rerun of what has been said dozens of times since Imran Khan took oath as the country's prime minister on 18 August 2018. While holding no brief for Ishaq Dar's flawed policies that included an overvalued rupee made possible through injecting large amounts of dollars into the market, foreign exchange reserves accumulated through borrowing in dollars (by rationalizing that the rate of return on foreign borrowing was lower than on domestic borrowing), and the inordinate focus on reducing the budget deficit through raising taxes; yet this does not and should not be used as a justification for the state of the economy eighteen months later.

Nonetheless, Sheikh did a Dar (after contacting an IMF loan in 2013) when he cited comments of support by multilateral institutions as well as by Moody's and Bloomberg - comments that he is surely aware would not have been forthcoming had he not taken the country on an IMF programme as such a programme provides a comfort level to multilaterals to extend programme (budget) support as well as rating agencies focused on the debtor nation's repayment capacity. But neither of the two bothered with criticisms and recommendations by domestic economists, with Sheikh going so far as to state that critics of the programme would not be allowed entry into the IMF corridors.

To date the government has not focused on the IMF programme's devastating impact on productivity, unemployment, inflation and quality of life - and it is unclear who should be held more responsible, i.e., the IMF team or the first time negotiators from the Pakistan side. Sheikh cited a few figures which are extremely suspect notably a rise in cement output of 5 percent, a rise in automobile sales with Pakistan Bureau of Statistics (PBS) released data on Saturday showing a negative 36.4 percent growth during July-December 2019 though it claimed an LSMI increase of 3.35 percent in December over November. Unfortunately, the more credible industry sources as well as anecdotal surveys indicate that the industrial and services sector has reduced output and the numbers employed. On Friday, PBS noted that the Sensitive Price Index declined this week past compared to the previous week by understating the actual price of some commodities for example wheat per kg price is noted at 45.4 rupee while it is available at 53 rupees per kg.

So what claims did Sheikh make. First he tackled the charge that the government has borrowed more than in previous administrations to pay off loans (multilateral/commercial/debt equity) incurred during 2013-18 and that Pakistan has to pay back 5000 billion rupees in the next two years (2020-22). He stated that various friendly countries have provided 8.5 billion dollars loans and a 3.2 billion dollar deferred oil facility for the next three years from Saudi Arabia, payable every year. However, in the Memorandum on Economic and Financial Policies uploaded on the IMF website dated July 2019 the government states that financing arrangements from friendly countries amounted to 6.3 billion dollars from China, 6.2 billion dollars from Saudi Arabia and 1 billion dollars from the UAE - or a total of 13.5 billion dollars which is 1.8 billion dollars less than what he stated in the assembly. This discrepancy is not insignificant as it constitutes 9 percent of the 20 billion dollar current account deficit inherited by the Khan administration and nearly 16 percent of the current account deficit at the time Hafeez Sheikh secured the job on 20 April 2019. Additionally, not included in these calculations is Qatar's loan of one billion dollars to Pakistan.

Sheikh made much of concessional borrowing during his speech however he did not mention the budgeted reliance on foreign commercial loans upped to 450 billion rupees from the revised targets of the year before of only 6.875 billion rupees - the most expensive source of borrowing with a very short amortization period. This massive reliance on commercial loans from abroad was a policy favoured by Dar as well.

Be that as it may, Sheikh did acknowledge that the rupee depreciation had increased the government's foreign debt in rupee terms however while dwelling on the stability of the rupee in recent months he failed to mention that the rupee is undervalued to the tune of 4.5 percent as of November 2019. This is, in effect, a half truth. The State Bank of Pakistan clarified that "often appreciation or depreciation of REER is confused with the concept of currency overvaluation or undervaluation although these are two separate concepts...the REER merely shows a comparison relative to the chosen base year...." Claiming that to determine over and under valuation is a medium term analysis using sustainable norms for the current account balance, fiscal balance, demographic conditions, debt etc." And then the warning "the exchange rate is a very delicate topic to comment on due to its sensitivities for the economy and particularly the financial sector. Any casual remark could have deep negative repercussions, which an economy like ours going through a stabilization phase cannot afford."

A rejoinder is in order. Former SBP governors as well as staff openly acknowledge that the relevance of the calculation of the REER was to determine policy though they concede that SBP under Dr Reza Baqir may have changed the definition for after all he also reset the discount rate by linking it to Consumer Price Index rather than to the core inflation as in the past. If the SBP has done so then it must come out and openly acknowledge that point. Additionally, one would assume that it has finally been brought home to the current SBP Governor that there is no linkage between an undervalued rupee and a rise in exports, a policy that the US accused China of implementing to get an unfair advantage in its international trade.

Sheikh claimed that borrowing from the SBP has been zero since July. True but this too is only a half truth as he failed to mention that the new economic team leaders - Sheikh and Baqir - engaged in three open market operations - (i) on 9 May 2019 an offer of 1,269,450 million rupees at 10.70 percent; (ii) the next day another 1,921,400 million rupees at the same rate; and (iii) on 17 May 1,727,750 million rupees was offered at 10.70 percent - five days after the staff level agreement with the IMF was reached while the loan itself was approved by the IMF Board in the first week of July. These rates were higher than the rates during the tenure of Asad Umar as the finance minister. Hammad Azhar in August 2019 publicly acknowledged that the government built its cash reserves as under the then ongoing negotiations with the Fund the government was aware it would no longer be allowed to borrow from the SBP.

Sheikh also claimed that fiscal deficit declined citing figures for the first quarter of the year (when social sector development allocation was less than one percent of what was budgeted and noted under grants and transfers - a component of current expenditure, while Public Sector Development Prgramme received 8.8 percent of the total budgeted allocation prompting the Fund to seek a commitment during the first review that this would be rectified in the next quarter for which figures are awaited though they were shared with the Fund during its recently concluded second review mission. He also made much of the containment of expenditure on Prime Minister's House and the Presidency as well as in salaries of ministers/senior army personnel and senior bureaucrats which he said was unprecedented. However, he failed to mention the amount of savings under this head (a drop in the ocean given the government's total expenditure for the year though one must appreciate the fact that it did set a positive trend).

Be that as it may, Sheikh mentioned that the civilian government expenditure was reduced by 40 billion rupees (no doubt mainly due to lower releases under Ehasaas programme). The budget pre-approved by the Fund envisages a rise in current expenditure from 4.6 trillion rupees to 6.1 trillion rupees - a rise of 33 percent with only 190 billion rupees allocated to the Prime Minister's signature Ehsaas programme (3 percent of the total current expenditure) and if this was the government's priority it certainly is not reflected in the percentage allocations. The rest of the 33 percent notwithstanding Sheikh's claims in the assembly reflect a significant rise.

Equally disturbing is the fact that fiscal deficit projection for the current year is at 7.6 percent as per the IMF's first quarterly review report (up from the budgeted 7.2 percent). Non tax revenue Sheikh pledged to the assembly will be around 1500 billion rupees more than budgeted which may, many argue, require a loot sale of state properties raising the ugly spectre of litigation. Others point to the fact that privatization, if procedures are strictly adhered to and all areas of concern taken into account, may take more time than the remaining period of the current fiscal year.

The rate of increase of the circular debt has declined, he added, from 38 billion rupees monthly to 12 billion rupees monthly. This data has not been independently verified however what is clear is that tariffs (including all surcharges and adjustments) have risen tremendously during the past eighteen months. True that the Khan government extends subsidies to the power sector consumers but that policy has been in place well before Sheikh began to make periodic forays into the power corridors of Pakistan. Subsidy to Wapda/Pepco was raised by around one billion rupees from what was realized last year and 55 billion rupees from what was budgeted in 2018-19 while KESC would receive 19.5 billion rupees more from what was realized last year and more than 44 billion rupees than what was budgeted). The IMF's standard condition is full cost recovery but given the lack of any improvement in governance this condition is being met through higher surcharges and adjustments just as in the previous administrations.

Primary deficit (minus interest payable) is 0.6 percent of GDP, a prior condition of the Fund, achieved in the first quarter though as aforementioned one would have to wait for the release of second quarter data before making an informed decision on the matter though the IMF press release after the second review mission notes 0.7 percent primary deficit. Again there is a need to wait for the release of actual data, however manipulated, before a more definitive assessment can be made.

Refunds last year have been all but cleared Hafeez stated though he conveniently failed to mention that with zero rating last year the refund repayments were small compared to this year. Be that as it may, last year the government released 21.16 billion rupees refunds out of total claims of 100 billion rupees (government figure which varies markedly with the exporters figure) while this year it released 103 billion rupees out of total claims of 150 to 200 billion rupees showing a marked improvement this year.

To conclude, there was no truth, only half truths, and lies with a heavy dose of my way or the highway as far as Dr Hafeez Sheikh's speech was concerned. This must be a source of deep concern for the Prime Minister.