Continuity in economic policies is considered critical in providing a sustained conducive environment for private sector activity — a continuity that is naturally disrupted with a change of government.
Imran Khan lost the office of prime minister twice in one week’s time: (i) on 3 April 2022 when, upon his own advice, the President dissolved parliament and issued a circular stating that “consequent upon the dissolution of the Pakistan Assembly by the President of Pakistan in terms of Article 48(1) of the constitution of the Islamic Republic of Pakistan vide Ministry of Parliamentary Affairs, Mr Imran Ahmad Khan Niazi ceased to hold the office of the Prime Minister of Pakistan with immediate effect.” Later that day the President tweeted that “Imran Ahmed Khan Niazi shall continue as the Prime Minister under Article 224 A (4) of the Constitution;” and (ii) more permanently on 10 April, an hour after midnight, after he failed to survive the vote of no-confidence in parliament tabled on 8 March 2022.
Shehbaz Sharif was elected as the new prime minister on 12 April 2022 with the Pakistan Tehreek-e-Insaf (PTI) boycotting the session. The why now query frequently raised by the PTI was, as per several leaders of the eleven coalition party in government today, due to their serious reservations at the unilateral electoral reforms ushered by the PTI government: the use of electronic voting machines in the next elections (which they pointed out were not universally accepted and therefore should not be used in the country in the 2023 elections) and granting overseas Pakistanis the right to vote from the very same constituency that they emigrated from which, based on the assumption that overseas Pakistanis would overwhelmingly vote for PTI, may raise the number of PTI’s seats by 30 to 35. The then opposition parties proposed as few as 6 separate (dedicated) seats for overseas Pakistanis.
Focus on this political objective undermines the general anxiety on the state of the economy today – a state that showed signs of severe stress when the International Monetary Fund (IMF) refused to renegotiate the terms agreed in the second to fifth review (first quarter of 20221) compelling the then finance minister Shaukat Tarin to ensure the passage of two unpopular bills from parliament by the end of 2021 early 2022 before the sixth review agreement was reached in early February 2022 – withdrawal of exemptions amounting to over 343 billion rupees which he claimed were an attempt to widen the tax net and would be reimbursed (the bulk of the envisaged reimbursement still awaited) and the granting of autonomy to the State Bank of Pakistan (SBP) which may not be such a landmark bill given the prevalence of de jure as opposed to de facto conditions in this country.
Imran Khan then proceeded to compromise the capacity of his administration to successfully conclude the seventh review and announced two relief packages: (i) on 28 February he raised subsidies by 2 billion dollars as per estimates by announcing a 10 rupee per litre decline in the price of oil and products at a time when their international prices were rising due to the Russian-Ukrainian war and pledged to keep these prices constant till 30 June 2022. He also reduced electricity charges by 5 rupees per unit; and (ii) granted tax exemptions, anathema to the IMF and other donor agencies, in his 1 March industrial policy.
The IMF did not accept the rationale that these two packages could be adjusted through (i) dividends payable to the government, dividends unpaid by the oil companies for years due to the accumulating circular energy debt; (ii) taxes collected were higher than envisaged (though not higher than what was budgeted); and (iii) the unused amount earmarked for the pandemic. This was indicated by the suspension of talks between the government and the Fund.
There is a consensus between the economic team leaders of the Khan administration as well as the new team that the stalled IMF seventh review needs to be agreed on an emergent basis to ensure borrowing from external sources – multilaterals/bilaterals/debt equity from issuance of Eurobonds/sukuk/commercial borrowing – is possible and at affordable rates.
The Khan administration budgeted up to 14 billion-dollar inflows in the current year – projected to have increased by at least 2 billion dollars due to the relief and industrial package announced earlier this year. The Shehbaz Sharif-led government has opted not to withdraw the two relief packages yet thereby allowing political as opposed to economic considerations to continue to prevail.
The incumbent government has also not identified what expenditure items would be slashed. That pretty much leaves only one option on the table: reliance on friendly countries for assistance – a policy that was also vigorously pursued by the Khan administration in 2018 when more than 10 billion dollars from friendly countries – Saudi Arabia, the UAE and China – was pledged. However, this was not enough to contain the current account deficit of 20 billion dollars without also implementing severely contractionary policies that were particularly harsh on the common man as the projected inflation for the year was 13 percent and the projected GDP growth only 1.5 percent.
Khan’s critics point to the army chief’s visit to the capitals of the three friendly countries pre-dating his visit to ensure a conducive environment for the release of the funds. However, what consistently ignored by the Khan’s team at a cost of compromising the amount and terms of the assistance pledges was the historical sensitivities of these three donor countries – sensitivities to not publicly announce the amount and terms of support.
In this milieu the then Governor SBP, Reza Baqir, took two flawed decisions which had severe implications on the quality of life of the general public: (i) raised the discount rate to 13.25 percent in July 2019 at a time when core inflation (non-food and non-energy) was 8 percent which throttled productive activity leading to a rise in unemployment; and (ii) transformed short term into long term loans which at 13.25 percent discount rate led to a significant rise in the budgeted mark-up payments.
The Ministry of Finance also engaged in two policies with severe negative repercussions on the general public: (i) an unsustainably high budget deficit, a highly inflationary policy; and (ii) a massive rise in current expenditure – from the 4.3 trillion rupees in 2017-18 to 7.5 trillion rupees (minus Khan’s two relief packages noted above).
At the time the Khan administration left office in addition to the stalled IMF programme the two Arab friendly countries had not met all their earlier pledges - assistance as well as a sizeable investment programme – and the 3 billion dollar Saudi support parked with the SBP was for one year with extremely stringent conditions. China too began to express concerns over the sustained failure of the government to release funds as per the contractual agreements for projects under the China Pakistan Economic Corridor.
Prime Minister Shehbaz Sharif’s visit to Saudi Arabia is hailed as a success because not only did he make an unscheduled stop over in Dubai (that most likely was arranged by the Saudi Crown Prince) but also because he left his finance minister in Saudi Arabia to streamline Saudi assistance. However, there has been no official announcement of the exact amount of assistance which may be in deference to the reluctance of these two countries to publicize the amount and terms of their assistance. Significantly, a UAE high level investment team visited Pakistan the day after Eid was celebrated in the Emirates which coincided with the day Eid was celebrated in Pakistan which again shows a committed intent to support the economy.
Shehbaz Sharif is reportedly scheduling visits to Qatar as well as China in the near future and there is talk of not only strengthening foreign exchange reserves with the SBP that are at present less than two months of imports - not quite because of political uncertainty as claimed by Hammad Azhar, but because of repayment schedule and payment of nearly one billion dollars for the Reko Diq deal made by the previous government. However, Azhar is correct with respect to foreign currency accounts held in banks by the private sector as around a billion dollars have been withdrawn.
In this milieu where silence would pay dividends as far as the friendly countries support is concerned Finance Minister Miftah Ismail is muddying the waters by constantly attacking former Prime Minister Imran Khan and claiming successes that he is not in any position to discuss or reveal publicly. This brash approach no doubt the outcome of cries of thief, thief, hurled at him in public places is not doing any favours to the current set up. One can only advise silence and urge Ismail to follow the dictum that actions always speak louder than words for public figures.
To conclude, it is hoped that Shehbaz Sharif passes a gag order on at least those cabinet members who are from the PML-N, especially those who are unelected, and whose interactions with the media are very unhelpful. He must also direct Ismail to begin the budget exercise in earnest and to identify where cuts in the budget for the current year will be made and in which sectors reforms will be initiated and of course the time line of these reforms.
Copyright Business Recorder, 2022