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Begging bowl, inflation and Ishaq Dar! – I-

The PML-N manifesto promises have clearly taken a back seat to Federal Finance Minister Ishaq Dar’s economic policies on two counts: the begging bowl is not only out and strengthened with more pleas to bilateral and multilateral donors with some rather glaring negative repercussions on security related matters but also inflation is rising that naturally targets the poor a lot more than the rich.

The 2013 election manifesto claimed that the party’s focus in government would be on sustainable and inclusive economic growth which requires “sound macroeconomic policies to reduce deficits in the budget and the balance of payments, curb inflationary pressures and reduce country’s dependence on foreign loans and assistance.” It is indeed unfortunate that President Mamnoon Husain decided to defend the indefensible namely the failure of the Finance Minister to adhere to the election manifesto by stating that the dependence on foreign loans can not be reduced yet as the country is compelled to take loans to repay past loans. And in the spirit of the ‘good cop bad cop’ strategy a day later a politically astute Prime Minister expressed displeasure at the growing perception that the state of the economy was poor and directed Ishaq Dar to brief the cabinet in the presence of the media to dispel the flawed perception.

The critical question today is whether the perceptions are flawed or whether the policies are flawed? Unfortunately negative perceptions can do untold damage to the economy as its prime movers namely the private sector including foreign, local and portfolio investors, are guided by their perceptions. It is perceptions that can convert a buoyant market into a depressed one from which investors would automatically shy away from. Thus no finance minister can dismiss perceptions even if he considers them as not relevant. And Dar too could not dismiss the negative perceptions of the business community, PML-N’s single largest support group, and was compelled by politically savvy Prime Minister to reverse his budgetary tax proposals including (i) waiving the condition of submission of CNICs/NTNs and addresses of unregistered retailers, (ii) reducing the penalty for non-filing of returns, (iii) abolishment of mandatory filing of wealth statement and (iv) restraining tax officials from accessing bank accounts of existing taxpayers. The net outcome of these reversals on tax revenue of the government during July 1-December 27 was estimated at 70 billion rupees, however, there was an increase in collection of around 17 percent when compared with the comparable period last year namely 937 billion rupees as against 794 billion rupees last year. The major increase out of the rise of 143 billion rupees was in sales tax collections – from last year’s total of 370 billion rupees to 466 billion rupees (a rise of 96 billion rupees) due to raising sales tax from 16 to 17 percent effective almost as soon as Dar took over the Finance portfolio. And its impact on the rate of inflation was considerable raising the rates of nearly all items propelling the rate from around 5 percent in June 2013 to over 10 percent. In this context it is also relevant to note that the sales tax exemptions granted to encourage industry/ price of essentials down are estimated at 242 billion rupees and the Minister of Finance has accepted the IMF’s 6.4 billion dollar Extended Fund Facility condition to end all exemptions by end December of last year which has not yet been done. If that condition is complied with then revenue would rise but so would inflation.

But Dar did anticipate this and notes in the August Letter of Intent submitted to the IMF dated August that “inflation reduction will not be a primary focus of the first year of the program so as to mitigate the impact of the envisaged fiscal contraction.” However, the LoI added that beginning of this year the monetary policy would focus on reducing inflation and that objective would be severely compromised by Dar’s inordinately heavy budgeted reliance on raising the permanent domestic debt from 87 billion rupees in the revised estimates of last year to over 292.5 billion rupees this year. Jeffery Franks, the IMF mission head in Pakistan, expressed concern about the massive rise in government borrowing, including printing currency, and said that inflation is largely a function of macroeconomic policies, responsibility for which is with Dar, rather than due to profiteering blame for which can be laid on the doorstep of the provincial governments.

Dar, in a fashion now typically associated with him, threatened the currency speculators for allowing the rupee to plummet and need one add this was necessary given that the State Bank of Pakistan did not intervene in the market as agreed with the IMF, unlike the PPP-led coalition government.

So while domestic debt is allowed to rise to unprecedented levels would Dar’s reliance on foreign debt decrease? Dar has budgeted 576.4 billion rupees from external resources – 332.9 billion rupees higher than the revised estimates of last year. Servicing of foreign loans plus repayment are budgeted at 455.7 billion rupees or 122.8 billion rupees (around 1.1 billion dollars) more is required that would have to be plugged from either a trade surplus (and considering Pakistan has been perpetually in a trade deficit this is unlikely) or remittances. Thus rising imports plus repayments of foreign loans have been putting considerable pressure on the net reserves, pressure that would continue until and unless other sources are tapped. This explains why Dar’s begging bowl is constantly out in discussions with multilaterals and bilaterals.

So what are Dar’s options? Could he do any better than he is doing? Dar must reduce expenditure and focus on non-development expenditure. He constantly states that the government by ending discretionary funds of the prime minister and federal ministers has reduced expenditure by 42 billion rupees, instead of spending double what was budgeted by Raja Pervez Ashraf during his one year election year premiership. However, Ashraf spent these funds on development projects though they were mainly in his own constituency. Dar instead has budgeted a raise in general public services not defined elsewhere from 6.9 billion rupees in the revised estimates of last year to a whopping 33.7 billion rupees this year and executive, legislative organs, financial and fiscal affairs, external affairs outlay from 1779 trillion rupees to 1966.5 trillion rupees – an increase of 188 billion rupees. His questionable policy of clearing the inter circular debt at one go, with a better option being clearing half of the debt and investing the other half in development projects that would have raised generation, output and employment, needs to be revisited given the fact that the circular debt has resurfaced at the same pace as during the tenure of the PPP government.

Dar’s growing number of detractors therefore legitimately argue that his policies are flawed in two respects: they not only violate the PML-N election promises in not breaking the begging bowl and not reducing inflation but also fail to convince the markets that the direction of reforms, however unpopular with the rank and file, are in keeping with the needs of the economy, which led to a revision of budgeted policies with implications on revenue generation, the deficit and the price rise.

Part II to appear next week would focus on the IMF first review report, the first quarter LoI and impact on the economy.

Anjum Ibrahim, "Begging bowl, inflation and Ishaq Dar! – I-," Business recorder. 2014-01-13.
Keywords: Economics , Economic issues , Economic policy , Economic growth , IMF loan , Macroeconomics , Inflation , Economy-Pakistan , Ishaq Dar , PMLN