The Khan administration inherited two unsustainable deficits that continue to plague its seven and a half months long tenure: current account and budget deficit. The current account deficit by end June 2018 was estimated at around 18 billion dollars, the highest in the country's history, and the only possible way to plug it in the current fiscal year was through acquiring massive short-term loans from "friendly countries" - an effort spearheaded by Chief of Army Staff General Bajwa as per critics of the Khan administration and by the Prime Minister, with the full support of the Foreign Minister, by government stalwarts. However concerns about this deficit being postponed till such a time as the loan repayment and interest become due (next fiscal year) will remain till either the more desirable sources of foreign exchange earnings (exports and remittances) begin to meet the required outflows and/or the friendly countries agree to roll over the loans for an additional period.
The current account deficit inherited during the previous two civilian administrations as per the Economic Survey for the relevant years was as follows: (i) the PPP-led coalition government in 2007-2008 inherited a negative 13.7 billion dollar deficit (with a trade deficit of negative 15 billion dollars and remittance inflows of 6.4 billion dollars); (ii) the PML-N government inherited a deficit of negative 2.49 billion dollars in 2012-13 with trade imbalance amounting to negative 15.4 billion dollars and remittance inflows estimated at 13.9 billion dollars); and (iii) the PTI government inherited an imbalance of 18 billion dollars (with goods imports skyrocketing from 24.7 billion dollars in 2012-13 to 48.6 billion dollars by 2016-17 reportedly due to the China Pakistan Economic Corridor). A further rise in imports was reported in the Economic Survey 2017-18 - from 34.7 billion dollars in July-March 2016-17 to 40.5 billion dollars in July-March 2017-18.
Two observations are in order. First the current account deficit was not an overarching issue during the first year of PML-N administration. However a steady decline in exports was evident during Ishaq Dar's tenure as the finance minister - from 24.7 billion dollars in 2012-13 to 22 billion dollars in 2016-17 with last year's exports estimated at 23.228 billion dollars. The reason for the decline in exports is attributed to Dar's flawed fiscal (raise in taxes, direct and indirect, without taking account of their impact on productivity) and monetary policies (keeping rupee grossly overvalued) though he was forced to announce an export promotion package (which he did not fully implement). The decision of the Shahid Khaqan Abbasi cabinet, sans Dar, to implement the export promotion package in letter and spirit and allow for a rupee depreciation in an attempt to deal with the grossly overvalued rupee that was impacting negatively on our export orders raised exports but not by enough as anticipated mainly because of the prevailing uncertainty in the market that continues to this day. The Khan administration has continued with the export package, the rupee depreciation (though its options are more limited given the declining foreign exchange reserves with the State Bank) as well as slowed down the CPEC projects considerably resulting in a very small decline in the current account imbalance to-date though with obvious negative impact on growth projections as public investment in Pakistan spearheads growth.
And, secondly the Khan administration has convinced China to support a raise in Pakistani imports through fiscal measures to the tune of one billion dollars however with a deficit of over 17 billion dollars in our trade with China this amount is obviously inadequate.
The main issue facing the Khan administration that it has inexplicably not even begun to deal with is the budget deficit. The latest International Monetary Fund (IMF) report claims that Pakistan's budget deficit is "looser" than 2.5 percentage points of GDP than budgeted on the back of overestimated revenue and underestimated expenditure. The question is whether the PPP-led coalition government (2008-2013) and PML-N government (2013-18) also inherited unsustainable budget deficits and how they opted to deal with it.
Yousaf Raza Gilani was elected by the National Assembly on 25 March 2008 and took oath as the country's prime minister on 31 March 2018. Pakistan People's Party, with PML-N in coalition, agreed to give the finance portfolio to PML-N's Ishaq Dar - a portfolio that the PPP has invariably found a challenge to allocate to one of its own long term members/loyalists. Be that as it may, Dar's tenure was very short lived - 31 March 2008 to 13 May 2008 - and he employed that time to accuse the previous administration of blatant data manipulation, a charge that many maintain compromised his successor's capacity to negotiate a less challenging Stand-By Arrangement (SBA). Dar to this day claims one major input to the budget during that short tenure: the Benazir Income Support Programme that was later fine-tuned by the PPP stalwarts as well as multilaterals leading to considerable international support.
Two elements were implicit with Pakistan going on a Fund programme by September 2008. First and foremost the budget deficit that was unsustainably high at 8.5 percent by June 2008 was to be dealt with through time bound structural benchmarks that included a host of reforms (particularly in the power and tax sector), as well as measures designed to raise revenue and/or reduce expenditure. In other words, the PPP-led coalition government embarked on a Fund programme by September 2013 which led to a focus on reducing the budget deficit.
In 2013, Dar claimed a budget deficit of 8.2 percent by end June 2013 - a claim that is unfair to the 2008-13 PPP government on two counts: (i) Dar's penchant for manipulating data has been unprecedented in the country's history. He not only changed data from two years before he took over the finance portfolio in June 2013, to show a better output during his own tenure relative to his predecessor's than was the case; but (ii) also increased indebtedness for the outgoing year by borrowing over 400 billion rupees to retire the circular debt on the second last day of the year. However he too took the country to a Fund programme which again implied a host of time bound conditions/structural benchmarks designed to reduce the budget deficit.
What is extremely disturbing is that finance minister Asad Umar not only did not go on a Fund programme soon after taking oath, when the deficit was lower than it is now and would have been accompanied by less stringent conditions, but failed to comprehend the implications of his not setting limits to the budget deficit or acknowledge that a rise in the deficit would naturally and understandably raise the political costs of an IMF bailout package rather than narrow down the gap, as he claims. Sadly, Umar continues to make this claim and it is precisely this seriously flawed stance from an economic perspective that is a source of the steady decline in his credibility as an economic manager which is fuelling market uncertainty.
To conclude, an unsustainable budget deficit, and the government must take blame for widening the deficit during its seven and a half month tenure, accounts for the following:
(i) higher inflation, (ii) increase in public debt through borrowing from friendly countries and domestically through printing money/issuing bonds at high rates to be attractive (which crowds out private sector credit), and decreasing public sector development programme.