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Economic impasse — yet again

The political impasse triggered by the Deputy Speaker’s 3 April ruling dismissing the no-confidence motion against Prime Minister Imran Khan by terming it unconstitutional alleging that it was backed by foreign powers could not have come at a worse time in the country’s economic history.

Pakistani governments have time and again subordinated economic considerations to their political compulsions and that needs to change for the price has been largely paid by the general public. The Musharraf-led government heavily subsidised imported petroleum and products in 2007 when the international price had risen to more than 140 dollars to the barrel to ensure that the King’s party did not suffer in the 2008 polls. The result: King’s party lost the elections heavily and left a current account deficit that required the immediate commencement of negotiations with the International Monetary Fund (IMF) soon after the PPP-led government took over power.

By 2012, it was acknowledged that whichever party came to power after the scheduled 2013 elections an IMF package was required. The reason: continuing severe energy shortages, in spite of the extremely controversial rental power projects contracts signed by the government which, as per Asian Development Bank that undertook the third party audit, envisaged a 31 to 45 percent increase in tariffs and more than 5 billion dollars in foreign exchange over 5 years. Reforms agreed with the IMF with respect to energy and tax sectors were never implemented and the loan was suspended in 2010 with two tranches remaining.

Ishaq Dar’s control of the finance ministry in the first week of June 2013 began with an attempt to clear the circular debt through payment of 480 billion rupees on a Saturday, the second last day of June 2013, that required the banks to open on a holiday. This payment was declared by the Auditor General of Pakistan, a Dar appointee, as an irregular payment, violative of the rules as it was made directly to the State Bank of Pakistan and bypassing the Accountant General of Pakistan in February 2016. In addition, the Dar years were marked by economically flawed policy decisions including keeping the rupee over valued while relying on borrowing from abroad rather than from the domestic market for the inane reason that the rate was lower abroad than in Pakistan. This led to lower exports, higher imports and an understated debt which ballooned as soon as the rupee was allowed to depreciate – a decision necessary in support of the balance of payment.

Circa 2018: the highest ever current account deficit and external debt of 95 billion dollars – or nearly 30 billion dollars was added to foreign debt during the PML-N tenure. The Khan administration pledged to borrow only to pay off past loans, and to effect major economies (savings). Today the situation is dire: (i) foreign debt is over 130 billion dollars and includes repayment of previous loans, interest and repayment of principal on maturity of sukuk/Eurobonds as well as issuing new debt equity paper, commercial loans and rescheduling loans at much higher annual rates, 13.25 percent end 2019, than before; (ii) the current non-development expenditure (highly inflationary as it injects money into the economy without raising productivity) rose from 4.3 trillion rupees in 2018 to the budgeted 7.5 trillion rupees in the current year. Significantly the Pakistan Tehreek-e-Insaf government acknowledged in parliament that 10 billion dollars borrowed from external sources was used to fund the budget. And domestic debt rose from 16.4 trillion rupees inherited by the Khan administration to over 27 trillion rupees today; and (iii) trade deficit has widened to a historic high of 35.39 billion dollars with remittances having taken up some of the slack but sadly not all by rising from under 22 billion dollars in 2018 to close to 30 billion dollars last fiscal year.

So what did the government do to deal with threats by the opposition starting February that they would table a vote of no confidence? Announce a relief package on the last day of February that envisaged a 10-rupee reduction on per litre petroleum and products and a 5-rupee reduction in electricity tariff till end of fiscal year on 30 June. This package implies not only a rise in subsidies which the government can ill afford but also a decline in revenue as petroleum levy and sales tax on these items account for around 20 to 25 percent of all government revenue. To add insult to injury on 1 March, Khan announced an industrial package envisaging exemptions (this at a time when his data collectors were stating that the economy had already picked up with a 5.37 percent growth rate for last year, and sales of cars, and cement were way up) and an amnesty scheme for certain industries that is likely to be challenged by the Financial Action Task Force and the IMF.

For those who argue that the relief package contained inflation for the general public there is a need to look at the following data: headline inflation or Consumer Price Index actually rose after the package – from 12.2 percent year on year in February to 12.7 percent in March, core inflation (non-food non-energy items) also rose from 7.8 percent in February to 8.9 percent in March though SPI declined from 18.7 percent to 13 percent in March. However, for the week ending 7 April 2022 the SPI was 17.87 percent. Wholesale price index remained remarkably constant registering 23.6 in February and 23.8 percent in March.

The outcome of this largesse from the taxpayers account has been a rupee almost in a free fall with an interbank rate peaking at 188 rupees to the dollar on 7 April (against 178.6 rupees to the dollar on 8 March 2022). The discount rate rise by 250 basis points after an emergent meeting of the Monetary Policy Committee on 7 April has allowed the rupee some gains though this may remain a challenge as long as the accompanying contractionary policies are not implemented by the government.

Pakistan desperately needs an economist in the Ministry of Finance but one who is able to look out of the box. Imports from multilaterals with long experience in giving the same medicine for different malaise has not worked for Pakistan. Besides these imports are trained bureaucrats, albeit in the international arena, and are therefore susceptible to buckling down from whosoever out ranks them. The names of three highly qualified economists/academics, originally proposed by Khan as members of his economic advisory council, were dropped due to religious sentiments. They may have been able to ensure that the economy was sustainable today and support for the Prime Minister by the general public much more widespread.

To conclude, Pakistan needs an economist desperately and one can only hope that someone with the right credentials rather than the right nationality or religion or connections is appointed yet again to play havoc with the economy and the people of this country.

Anjum Ibrahim, "Economic impasse — yet again," Business recorder. 2022-04-11.
Keywords: Economics , State Bank , Economic considerations , Monetary policy , Political , Economic , Opposition , Petroleum , Imran Khan , Pakistan , IMF , PPP , PMLN

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