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Of this and that!

Pakistan hosted two foreign missions this week past – one, an operational mission sent by the Saudi government to determine areas of possible investment in Pakistan as agreed during Prime Minister Imran Khan’s two-day visit to the Kingdom on 18 September and, two, a routine International Monetary Fund (IMF) mission to carry out Article IV consultations (27 September to 4 October).

The hype created with the visit of the two missions is sourced to the Minister of Information Fawad Chaudhry as neither mission directly engaged with the media. The Saudi mission through signing a non-binding Memorandum of Understanding (MoU) available with Business Recorder agreed (and one may assume will recommend to the decision-makers back in Riyadh) ‘to assist… in promoting investment opportunities in Pakistan especially in the refining of Arabian crude, distribution, marketing and related downstream sectors subject to laws and regulations in force and applicable in Saudi Arabia and Pakistan;’ however, before any final decision and, one may assume before inking a binding contract, the MoU nominated state owned entities, Pakistan State Oil and Saudi Aramco, to ‘conduct/study investment opportunities in the refining/chemicals, distribution, marketing and related downstream sectors in order to evaluate the economic and technical feasibility of these opportunities in Pakistan while taking account of all logistical and regulatory factors including (i) securing favourable investment incentives for an acceptable rate of return based on size of the potential investment….(iv) the allocation of appropriate tax exemption as per policy.’ The MoU does not mention the setting up of an oil refinery in Gwadar as stated by Fawad Chaudhry during his press briefing though no doubt the matter was discussed during the field visits; reports indicate that setting up another refinery in Balochistan was also discussed.

Does the MoU represent a good deal for Pakistan? A refinery or two set up in Pakistan with Saudi investment would no doubt raise foreign direct investment considerably which, in turn, would reduce the current account deficit to perhaps sustainable levels in years to come. However, the timing of the investment is not certain and given that conducting a study is noted in the MoU it is a reasonable assumption that investment inflows may not take place for a year, or not during the current fiscal year. In addition, two other conditions contained in the MoU may create hurdles when and if the binding contract is signed between PSO and Saudi Aramco: (i) agreeing to Saudi as well as Pakistani laws and regulations applicable to Saudi investment, and (ii) ‘allocation of natural gas as feedstock for refining activities at mutually agreed prices,’ which may require an agreement with Sui Northern and/or Sui Southern to divert cheap domestic gas to the proposed refinery which, in turn, may create conflict with the provinces where gas is produced notably Sindh and Khyber Pakhtunkhwa.

The slow rate of progress in attracting foreign investment to meet the yawning current account and budget deficits as reflected in the MoU signed with the Saudi mission raised the hype about the visiting IMF mission and the need to go on yet another IMF programme. Unfortunately, the Fund mission leader, Harald Finger, was the same individual who endorsed Ishaq Dar’s several flawed policy decisions during the Extended Fund Facility (EFF) September 2013-16, an endorsement reflected by many more than usual waivers of structural benchmarks as well as: (i) under-stating the relevance of a sustained overvalued currency (rupee) on our trade balance, though Finger did cover his own hide by noting in a footnote after the first year of the EFF that rupee overvaluation is an issue and determined it was between 5 and 20 percent (though such a wide range reflects poorly on the Fund’s capacity); (ii) acknowledging that our foreign exchange reserves were based on rising debt equity that rose to unsustainable levels during the past five years, (iii) remaining focused on raising revenue rather than reforming the inequitable and anomalous tax structure which explains why the burden on existing tax payers increased manifold, and (iv) inordinate focus on reducing the budget deficit that compromised the country’s growth rate.

Finger on his departure from Pakistan issued a press release that conveyed preliminary findings wherein it was stated that the twin deficits – current account and budget – ‘reflect the legacy of an overvalued exchange rate, loose fiscal policy and accommodative monetary policy” – policies that, apart from an accommodative monetary policy, had his tacit support during the implementation of the EFF. True that with the end of the EFF the PML-N government exacerbated the problem through flawed policies including keeping the rupee overvalued (though the Abbasi-led government did take corrective measures with respect to devaluing the rupee though it was not enough), borrowing heavily from the foreign commercial market with a high rate of return and a very short amortization period, and raising reliance on withholding taxes in the sales tax mode whose incidence on the poor is greater than on the rich.

IMF’s press release highlights the issues facing the economy which are in synch with those the Business Recorder has been consistently pointing out notably that the supplementary budget is at best a work in progress; decisions would have to be made with respect to identifying additional measures required to meet the projected shortfall for the current year including borrowing requirements based on the success or otherwise of the Khan administration’s attempt to mobilize investment from Saudi Arabia and China and from overseas Pakistanis to either send higher remittances and/or purchase diaspora bonds (yet to be issued). The shortfall for the current year is estimated at 12 billion dollars by Asad Umar and 18 billion dollars by independent economists; however the supplementary budget envisages a reduction in expenditure of 75 billion rupees and higher revenue of 183 billion rupees or in total around 2 billion dollars – at best 10 billion dollars less than required.

Ironically, what would no doubt anger the Khan administration more than its assessment of the poor state of the economy and the need to ‘do more’ is Finger’s statement of support for the “large increase in gas tariffs closer to cost recovery levels and the proposed increase in electricity tariffs.”

And finally the impact of Shahbaz Sharif’s arrest may raise concerns for the eroding rupee market and the bearish stock market – the former has yet to reach its real value while the latter would remain volatile till the accountability process is seen to be across the board. The accountability process is distinct from politics however in this country accusations of political victimization are rendered believable because of massive corruption on all sides of the aisle.

To conclude, no one doubts that Punjab police under the PTI government, irrespective of opposition at present, will be reformed however the same cannot be said in terms of improving governance in other branches of government. The Prime Minister must make some necessary adjustments in granting executive positions to his own loyalists as well as those who joined the party little before the elections and who are being investigated by National Accountability Bureau as well as revisit some recent appointments in the senior bureaucracy.

Anjum Ibrahim, "Of this and that!," Business Recorder. 2018-10-08.
Keywords: Economics , Cheap domestic gas , Corrective measures , Anomalous tax , Accountability bureau , Large increase , Accountability process , PMLN , PTI , IMF , EFF

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