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Bad inheritance

Following the May 11, 2013 elections, the PML-N leadership appointed Senator Ishaq Dar as the country’s finance minister, a portfolio he has held twice in the past. The finance minister has inherited an extremely fragile economy. Perhaps no government in Pakistan has ever inherited an economy in as terrible a shape as this. What are the economic challenges that Foreign Minister Ishaq Dar has inherited and what should he be doing to address them?

Investment rate – a key determinant of sustaining higher economic growth – has slowed from 19.2 percent of GDP in 2007-08 to 14.2 percent in 2012-13, a loss of 5 percentage points of GDP in investment. The declining trend in investment along with the mismanagement of the power sector slowed economic growth to an average of 3 percent per annum. Slower economic growth has dampened the capacity of the economy to create jobs. Every year 2.5 million people are entering the job market. To provide jobs to the new entrants, the economy must grow at the rate of 7-8 percent per annum. If the economy has grown at the rate of 3 percent per annum, naturally all the new entrants have failed to get jobs and hence the pool of the unemployed has grown, resulting in the rise in poverty and inequality.

Fiscal indiscipline has been the hallmark of the previous regime. Budget deficit averaged at 7.2 percent of GDP during the last five years, resulting in the surge of public debt with a speed never witnessed before. Consequently, one-half of the revenue collected by the FBR is now being consumed for interest payment alone.

Senator Dar has inherited the rupee that has lost 38-40 percent of its value – thanks to Mr Shaukat Tarin – and is currently under severe pressure owing to the looming debt repayment crisis. He has also inherited a nervous and directionless private sector.

In short, Senator Dar has inherited the following: a nervous private sector; declining investment; slower economic growth; rising unemployment, poverty and inequality; large fiscal deficit; growing debt burden; a weaker currency fuelling inflationary pressure and contributing to circular debt; a looming debt-repayment crisis, rapidly declining foreign exchange reserves and a severe energy crisis.

These are formidable challenges by any standard, and require extraordinary courage on the part of the finance minister to take unpleasant decisions, call for a strong economic team, demand the focused attention of the political leadership in addressing the challenges and necessitate a relatively peaceful environment in which all the stakeholders are working towards restoring economic stability.

How should these multi-dimensional challenges be addressed? No government or finance minister will have the capacity to address all these challenges simultaneously. The finance minister needs to prioritise these challenges and address the core issue first.

Addressing issues in the power sector should be the topmost priority of the government. Availability of electricity will remove one of the critical constraints of economic growth. The government is already moving in the right direction. The circular debt issue is near resolution for the time being. The government will have to work harder to prevent its re-emergence after August 2013.

Restoring the confidence of the private sector should be the second most important priority of the government. The private sector was upbeat over the victory of the PML-N in the May 11 elections. Those in the private sector were waiting for Budget 2013-14 to understand the direction and priority of the government. They were also expecting Prime Minister Nawaz Sharif to visit all the chambers of commerce and industry to boost their morale. That has not yet happened.

The budget attracted mixed reaction and the prime minister did not get time to meet leaders of the private sector. Court battles, on the one hand, and the deteriorating law and order situation on the other appear to have dampened the exuberance of the private sector. I would urge the prime minister to visit the leading chambers of commerce and industry, meet the leading industrialists, bankers, leaders of the overseas chambers of commerce and the American Business Council at the earliest to let them know the direction of his government’s policy toward economic revival.

Meeting with the private sector should be a regular feature of his government’s governance. The finance minister can serve as a bridge between the PM and the private sector.

Having a programme with the IMF should be another priority for the finance minister. Negotiations are in progress and every effort must be made for their successful conclusion. This programme is essential to prevent external debt payment crisis as Pakistan’s useable foreign exchange reserves have dipped to a dangerously low level. A programme with the IMF will open avenues for external flows from different sources; it will restore the confidence of foreign investors, and other bilateral and multilateral institutions in Pakistan.

Maintaining financial discipline is a sine qua non for the success of the finance minister and his government. Resource mobilisation to finance the ever-growing expenditure requirements within a stable macroeconomic environment is a real challenge for the finance minister. Budget 2013-14 has many risks and the chances of achieving all the budgetary targets are low. The minister should be ready to undertake measures in the event of slippages either on the revenue or expenditure side or even both.

Managing fiscal decentralisation is the greatest challenge for the government. There is a built-in ‘manufacturing defect’ in the existing NFC Award and without addressing it, there can never be macroeconomic stability in the country. In the event of successful negotiation for the IMF programme, no federal finance minister will be able to deliver the targets of the programme – especially the target for budget deficit. We must acknowledge that a mistake has been made and it should be corrected in the larger interest of the country’s economy. There are ways to address this ‘manufacturing defect’. What is required is the will to address it.

Maintaining relative peace and stability in the major growth poles of the country and avoiding court battles will be key to the success of mobilising resources, encouraging the private sector to play an effective role and reviving the economy. The finance minister and his government must be seen to be taking serious initiatives in maintaining relative peace and stability in the country, especially in Karachi.

The finance minister must strengthen his economic team and appoint an effective spokesperson for his ministry. He does not have the capacity to answer questions in parliament, appear on talk shows, talk to the press and lead the Pakistani side to negotiate with the IMF simultaneously. He must avoid spreading himself too thin.

Finance Minister Dar has inherited a badly-damaged economy. He has to take a proactive approach towards prioritising and addressing the challenges. A perception of inactiveness seems to be emerging, particularly with respect to engagement with the private sector. Such perceptions must be changed with a proactive attitude. Finally, the government must avoid getting involved in issues, legal and political, that have the tendency to distract it from its economic agenda.

The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk

Dr. Ashfaque H Khan, "Bad inheritance," The News. 2013-07-02.
Keywords: Economics , Economic growth , Economic inflation , Budget deficit , Fiscal policy , Financial issues , Budget-Pakistan , Foreign investment , National issues , Economic policy , Government-Pakistan , Fiscal deficit , Policy-Pakistan , NFC Award , Foreign debts , Unemployment , Poverty , Ishaq Dar , Shaukat Tarin , PM Nawaz Sharif , Pakistan , GDP , PMLN , IMF