Ishaq Dar, the incumbent finance minister, is clearly unable to give any, let alone, due attention to the portfolio of finance that he nonetheless refuses to surrender. Today the country is witness to an unsustainable trade deficit and declining foreign exchange reserves that require emergent remedial decisions.
The narrative that the economy has deteriorated post-Panama Papers verdict is simply not correct as the trade deficit began to become a source of concern last year as did the previously debt enhancing foreign exchange reserves that began to dwindle subsequent to the end of the three-year Extended Fund Facility (EFF) by the International Monetary Fund in September 2016 – a period when a fully engaged Dar enjoyed unprecedented powers and had the blanket approval from the then prime minister.
Critical decisions that are required to be taken on an emergent basis must focus on how to deal with the budget deficit – through borrowing and, if so, from domestic and/or external sources, or through the passage of a mini-budget. Dar passed a (i) mini budget every year from 2013-14 to 2016-17 to meet the budgeted revenue shortfall which, he maintained, was designed to ‘encourage’ the staff of Federal Board of Revenue to work harder – a claim that was baffling as he relied on taxing the already taxed rather than widening the tax net to generate additional revenue; and (ii) by borrowing heavily from the external commercial banking sector at a high rate with a small amortization period – to the tune of over 4 billion dollars last year – as multilateral/bilateral budget support shrank due to loss of confidence in the government adhering to the reform agenda as dictated and monitored by the IMF while the country was on the EFF. The consequent rise in current expenditure was therefore mainly sourced to additional borrowing compared to what was budgeted.
The Finance Ministry today unfortunately appears to be following the Dar’s prescription and has signed: (i) short-term 703 million dollar commercial banking agreements for just three months (July-September) with 458 million dollars already disbursed; given that Dar budgeted one billion dollars under this head for the entire year it is likely that reliance on this may well surpass last year’s total of over 4 billion dollars; and (ii) 2 to 3 billion dollars sukuk is awaiting Cabinet approval though the ceiling on the rate of return has not been determined with the assumption being that a road show would determine it. There are however genuine concerns that the rate of return may well be above what was agreed by Dar (8.5 percent for 10-year bond and 7.5 percent for five-year bond as well as 6.5 percent for sukuk issued in 2015 and 5.5 percent for sukuk issued in 2016) given the rise in political uncertainty in recent months.
Closely associated with these decisions is the question as to how much deficit is sustainable and how much would compel the country to go on another Fund programme after elections? Are the current and development expenditure priorities appropriate for example how much can the current expenditure be scaled down, how much can the development expenditure be rationalized (inordinately focused on roads and to a lesser extent electricity generation as opposed to actual delivery to consumers) and how can governance be improved. Year after year, the government appointed Auditor General of Pakistan reveals billions upon billions of rupees lost to the system through corruption, maladministration and nepotism. And last but not least, the need to reform the tax system and increase revenue collections not through taxing the already taxed and relying on ease of collections as was Dar’s way rather than on reforming the tax structure by widening the tax net. These issues point to the urgent need to appoint a qualified and, more importantly, an honest economist with not only the capacity to enforce appropriate economic policies (rather than backing down for political reasons) but also with no history of manipulating data as the country’s next finance minister.
The Abbasi administration has taken some emergent decisions however; unfortunately, these too appear to be in line with Dar’s flawed prescriptions rather than reflecting innovative measures. Foremost amongst these measures is the export promotion package that has merely extended the date of applicability of the fiscal incentives approved by Nawaz Sharif and proposed by Dar in January this year. One would have hoped for more far-reaching reforms that included a rupee value reflecting a balance between the need to make our exports competitive in the international market and our rising outflows/repayments to external debtors.
So who is taking the more routine decisions that have implications for the general public? Who for example took the decision to pass on the price rise of all petroleum products as recommended by Oil and Gas Regulatory Authority (Ogra) except kerosene and LDO that witnessed half the increase proposed by Ogra? It is unclear who is taking these decisions, given that Ishaq Dar was last seen splayed out on a hospital bed with no monitors attached ostensibly in London, but responsibility must rest with the cabinet led by Shahid Khaqan Abbasi. It is also widely known in the federal capital that an aspirant for the position, Miftah Ismail, has not been endorsed by former Prime Minister Nawaz Sharif and perhaps for good reason: he has no previous experience as a finance minister, coupled with his failure to deliver a bilateral agreement with the United States during his tenure as head of the Board of Investment.
Nawaz Sharif himself was Punjab’s finance minister in 1981 though he has been responsible for some patently flawed policies as the prime minister including (i) insistence that a strong rupee reflects positively on the economy; (ii) a buoyant stock market is a reflection of a favourable investment environment ignoring the fact that the 40 plus brokers manipulate the market as and when the incumbent finance minister offers to continue fiscal incentives (the stock market generates around 2 to 3 billion rupees in taxes each year in contrast to India’s over 100 billion rupees); (iii) roads pave the way for the future which sadly has been at the cost of social sectors (education and health) as well as providing clean drinking water to all; (iv) reiterating that governance holds the key to success PML-N has nonetheless failed to improve governance in any state owned entity including Pakistan International Airlines; disturbingly the incumbent prime minister has 10 percent share in the profitable Air Blue but recently okayed a bailout package for PIA that would be throwing good money after bad; and (v) cheap credit appears to be a standard normal Sharif policy to encourage private sector investment however this facility, nine times out of 10, is hijacked by the rich (agriculturists and industrialists) leaving the inequities of our socio-economic system in place.
The Sharif team has always boasted economists within its senior ranks unlike the Pakistan People’s Party that has imported technocrats for the position. Sartaj Aziz with adequate qualifications and experience as the country’s finance minister is being allowed to underperform as Deputy Chairman Planning Commission while the administration struggles to grapple with rising economic issues. Shaukat Tarin saved this country at least 5 billion dollars, the sum of the rental power projects, by insisting on third party audit, and honestly adhered to structural reforms as much as politically feasible for the ruling PPP can be another candidate. The party would be well advised to appoint one of these two men to the position.Anjum Ibrahim, "Country needs a new finance minister," Business Recorder. 2017-11-13.
Keywords: Economics , Expenditure revenue , Economic growth , Economic policy , Annual budget , Budgeted revenue , Pakistan-Economy , Ishaq Dar , Nawaz Sharif , OGRA