EDITORIAL: Two days after Prime Minister Shehbaz Sharif reportedly held a telephonic conversation with Managing Director of the International Monetary Fund (IMF) Kristalina Georgieva on the still stalled ninth review and the finance minister’s statement to the press to the effect that Pakistan has met all its conditions it would be regrettable if IMF still does not disburse the withheld tranche, a formal statement was issued by Nathan Porter, the mission chief for the ongoing programme, that sanctimoniously expressed the hope that a peaceful way forward in line with the Constitution and the rule of law even though “we do not comment on domestic politics.”
While there is little doubt that political uncertainty fuelled by massive protests led by former Prime Minister Imran Khan for over a year did disrupt business sentiment and activity, yet the situation has been under control post-9 May 2023, almost three weeks since. And yet the economic impasse continues to deepen which must be laid at the doorstep of flawed domestic policy decisions.
Quantification of losses due to domestic political turmoil by a Finance Ministry focused on passing on the buck to factors other than its own policy decisions may be grossly overstated and there is an emerging consensus within the country that the policies supported by Ishaq Dar since he took oath as the finance minister on 27 September 2022 have cost the hapless economy considerably more than the damage due to political uncertainty: (i) controlling the rupee-dollar parity till 27 January 2023 cost the economy more than 2 billion dollars in remittance inflows through official channels as remitters shifted to the hundi/hawala system, a shift that is unlikely to revert to official channels, given the current differential of between 20 to 30 rupees per dollar between the interbank and the hundi/hawala rate – a ground reality that no doubt prompted Porter to use the present tense to state that “IMF staff continues the engagement with Pakistan authorities to pave the way for a Board meeting” and using the future tense to specify that “this engagement will focus on the restoration of foreign exchange proper market functioning;” (ii) the 110 billion rupees electricity subsidy to exporters, without any empirical evidence, past or present, that supports a linkage between utility/electricity subsidy and higher exports.
There is evidence that the government is considering similar utility subsidies in the budget for next year to businesses so as to claim that the budget is business-friendly. However, this would not only strain the severely limited revenue base largely supported by indirect taxes whose incidence on the poor is greater than on the rich but also compel the authorities to continue to rely heavily on domestic borrowing, a highly inflationary policy – from the domestic commercial banking sector that would further crowd out private sector borrowing (which declined by over 74.8 percent July-March 2023 compared to the year before) and to appropriate all private sector savings in the National Savings Centres that should ideally be available to private investors; (iii) raise current expenditure with the elite recipients receiving an upgrade in salaries and benefits while the Benazir Income Support Programme (BISP) maybe raised by 100 billion rupees from the existing 400 billion rupees to claim a pro-poor budget by citing a 25 percentage rise, however, this would not be more than 5 percent of the total budgeted outlay; additionally, subsidies would be raised but if they remain untargeted their impact would not be limited to the poor and the vulnerable which would further narrow down fiscal space; and (iv) the development budget maybe strengthened to show greater commitment than during the previous administration.
Given that the current year’s development budget has been massively curtailed, it would be safe to assume that slashing this item would be a way to bring the budget deficit to a sustainable level while placing heavy reliance on convincing China to engage in more projects under the China Pakistan Economic Corridor umbrella as a pro-growth policy, although non-payments to Chinese IPPs (independent power producers) are mounting.
These measures reportedly under consideration by the government would jeopardise the staff-level agreement on the ninth review which no doubt prompted Porter to use the future tense to state that the Fund will focus on the passage of the fiscal year 2024 budget consistent with programme goals and adequate financing.
The managing director (MD) of IMF, Kristalina Georgieva, is known for blunt speaking and on 6 April 2023 accused China of being “very slow to recognise that multilateral debt restructuring requires China to play by the rules that are already established…now is the time for China to demonstrate that they are capable of playing by these rules,” a statement that was countered by Premier Li Keqiang.
Li stated, among other things, that all parties should work together and share burden of low income countries’ debt problems. Such plain speaking to a financially powerful country by the MD IMF lends credence to the perception that she is unlikely to have minced words while speaking to prime minister Shehbaz Sharif too.
The problem therefore is more acute than acknowledged by the prime minister – it is one of neutralizing a finance minister with little capacity to think in economic terms rather than as an accountant and one who refuses to listen to world renowned economists because of the clout he enjoys in the cabinet.
The prime minister must surely be aware by now that the damage to the economy, to the quality of life of all but particularly of the poor and vulnerable, will have major repercussions on his party’s bid for a mandate in the next elections and it is still time to make the needed changes.
Copyright Business Recorder, 2023