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Economy: the muddling of fact and fiction

The strengthening of the stock market and the rupee – from a high of over 240 on 30 July 2014 to less than 214 this Friday past – a reflection of improved market sentiments, raises questions of who can legitimately take credit for the improvement. The response is purely along party lines with the eleven plus coalition government taking credit for averting a default for which it holds the previous government responsible; while the Pakistan Tehreek-e-Insaf’s (PTI’s) narrative is that macroeconomic fundamentals were better early April and have since worsened, (true in terms of the current account deficit, the budget deficit, inflation, and growth) and additionally are accusing the ‘experienced team’ of a worse performance than the three years and eight months of its own administration.

The constant reference to default by the two opposing political forces today is inexplicable. The possibility of default was not an issue in the IMF’s (International Monetary Fund’s) sixth review documents dated February 2022 wherein Pakistan’s public debt was seen as continuing “to be judged as sustainable consistent with the DSA (Debt Sustainability Analysis) published at the time of the second-fifth reviews in March 2021. Debt ratios have since been revised down due to a slightly stronger than projected exchange rate at end FY 2021 and a higher growth rate outturn. While the extension of the Debt Service Suspension Initiative until end December 2021 (covering about US one billion dollars of debt service in fiscal year 2022) continues to provide relief in the short term, the forward looking paths for gross financing needs have been revised upward due to larger than expected reliance on short term domestic issuance since late March 2021.”

So did the Khan administration take measures after the publication of the sixth review report that raised the prospect of default? On 28 February Imran Khan announced an unsustainable relief package that included subsidies on petroleum prices and electricity rates which was, in effect, tantamount to reneging on not only its pledge to the IMF to generate 610 billion rupees from Petroleum Development Levy (actual collected under this head as per the budget documents was 135 billion rupees) but also power sector reforms that had envisaged raising rates for end-consumers to achieve full cost recovery. On 1 March Imran Khan announced an industrial monetary and fiscal incentive package that included another amnesty scheme, this time specific to the construction industry till the end of June 2022. In spite of claims to the contrary the two packages were economically flawed and “unfunded” as per the IMF (with their actual cost subject to the actual international price of oil and products) while the industrial package was opposed by economists and multilaterals on two counts: subsidised tariffs were opposed as it required more untargeted subsidies which the government did not have the fiscal space to fund and an amnesty scheme was not supported as it is considered a disincentive to the honest tax payers.

Be that as it may, the success of the vote of no-confidence against Imran Khan in the early hours of 10 April indicates that his responsibility for the relief package/industrial package ended after about five weeks while finance minister Miftah Ismail ended the package in two phases – on 27 May and 3 June or, in other words, the incumbent government supported these packages for longer than did the Khan administration. So how much did the package actually cost the country? The budget 2022-23 document estimates the relief package at 250 billion rupees for which the previous administration can be held responsible for a maximum of 100 billion rupees. Subsidies for the power sector were higher than the budgeted amount by around 300 billion rupees in 2021-22; however, the bulk of this amount was payment to the independent power producers (IPPs) – the agreed amount payable subsequent to a well negotiated package between the government and the IPPs that favoured the consumers of this country, and included all IPPs except those operating under the umbrella of China Pakistan Economic Corridor (whose contracts were signed during the PML-N tenure 2013-18). However, while these amounts did raise the budget deficit to an unsustainable over 9 percent of GDP yet they are not enough to raise the horrendous prospect of default.

Federal Finance Minister Miftah Ismail in his quest to show a marked improvement in the performance of key macroeconomic indicators since his appointment on 19 April, a quest associated with his continuation in office in the extremely competitive sport of Pakistani intra-party and inter-party politics, has, more than any other cabinet colleague including the Prime Minister, hogged and continues to hog the airwaves. However, his repeated assurance that the rupee would rebound after the staff level agreement was announced on the IMF website on 13 July, echoed by the Acting Governor of the State Bank of Pakistan referring to an ‘unwarranted’ rise in the rupee dollar parity did not find traction in the market – not till the Chief of Army Staff called the US Assistant Secretary of State on 30 July requesting intervention with the disbursement of the next IMF tranche subsequent to the staff level agreement reached on 13 July 2022 after which the rupee value vis a vis the dollar has continued to strengthen.

Ismail and Murtaza Syed, Acting SBP Governor’s assurances clearly not backed by proactive measures failed to allay the market concerns for two reasons. First, speculative currency market with a handful of big players was not dealt with, perhaps because the team leaders Ismail and Murtaza Syed had limited experience of working in this country, a situation that they finally corrected which accounts for a decline in the current account deficit in July. Their critics would no doubt point out that the massive decline in the rupee was ample evidence of the prevalence of disorderly market conditions, as per the IMF definition, which allowed for intervention yet their delay in taking appropriate mitigating measures cost the country’s people an unprecedented rise in imported inflation. Additionally, the international commodity prices, particularly fuel and cooking oil, Pakistan’s major imports, declined last month which also reduced the import bill.

The reason for the claim that default has been averted is premised entirely on two assumptions. One that the previous administration would not have succeeded in restoring the Fund’s stalled programme due to Imran Khan’s relief and industrial packages. This is almost certainly a flawed assumption as never did the previous finance minister Shaukat Tarin ever maintain that the Fund package was not critical to the Pakistan economy. If the political clouds around the Khan administration had dissipated the two packages would have been withdrawn, perhaps even sooner than on 27 May, and all prior IMF conditions that have since been implemented by the incumbent government would have been implemented.

The second assumption that the inflows subsequent to the restoration of the Fund programme would not have been available to the Khan administration from friendly countries due to its isolationist foreign policy is perhaps also wishful thinking. Foreign policies of our friendly countries are not dependent on the personality of the head of government but on their perception of Pakistan’s strategic importance. Be that as it may, it is relevant to note that as was the prevailing situation during the last days of the previous administration external inflows (all borrowings) from multilaterals and release of the pledged assistance from friendly countries — Saudi Arabia, China and the United Arab Emirates — are contingent on the release of the next disbursement by the Fund.

Pakistan requires around 40 billion dollar external borrowings in the current fiscal year as per Miftah Ismail — the highest ever in the country’s history in a single year: 21 billion dollars is required to pay off interest and principal (as and when due) on foreign loans/Eurobond/Sukuk, to meet the current account deficit which implies trade deficit minus remittance inflows, and of course strengthening the very low foreign exchange reserves available today by around 5 to 7 billion dollars. What is inexplicable is borrowing around 8 to 10 billion dollars for Ismail’s budgeted expenditure allocation that has risen by a trillion rupees this year. Would Tarin have done differently? One doubts that given that 2021-22 budget envisaged a rise of a trillion rupees in current expenditure in comparison to the year before – from the revised estimates of 6.56 trillion rupees in 2020-21 to 7.5 trillion rupees in 2021-22.

To conclude, it is little wonder that the government’s narrative that it is paying a political cost for taking economically sound decisions is not finding traction and one can only hope that the Prime Minister revisits the performance of his existing economic team leaders who are following the dictates of the Fund without exploring out of the box solutions.

Anjum Ibrahim, "Economy: the muddling of fact and fiction," Business recorder. 2022-08-15.
Keywords: Economies , Monetary fund , Higher growth. Petroleum prices , Economy , Imran Khan , Shaukat Tarin , Miftah Ismail , Saudi Arabia , China , United Arab Emirates , IMF , GDP , PTI

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