The markedly different perceptions of the state of the Pakistan economy today between PML-N’s stopgap finance Minister Miftah Ismail (stopgap as his appointment both times was subject to Ishaq Dar’s physical availability in the country when the party was in power) and the incumbent Ishaq Dar who is currently holding the portfolio for the fourth time has become increasingly acrimonious in recent weeks.
The party supremo Nawaz Sharif remains firmly behind Dar, convinced that he can steer the crude raft that epitomizes the state of our fragile economy to safe waters, with Dar’s critics maintaining that the waters he is steering the economy towards are shark infested. Be that as it may, this evident overarching support places Dar in a unique position amongst Pakistani finance ministers even though he has clearly never used this support to implement reforms in sustained appallingly poor performing power and tax sectors; some however maintain that Sharif’s support did not extend to allowing Dar to take politically challenging decisions.
A large number of Dar’s critics challenge his academic credentials. He is a graduate in Commerce from Hayley College and is an Associate Member of the Institute of Chartered Accountants in England and Wales though the company he was articled with has never been mentioned in any uploaded resume – companies that range from Price Waterhouse Coopers with 5 billion-pound turnover employing over 30,000 to Deloitte to Ernst and Young to a one or two-man outfit.
In marked contrast Miftah Ismail has impeccable academic qualifications – a doctorate in public finance from Wharton School, University of Pennsylvania, that makes his recent critique extremely relevant. And his analyses are strengthened by the fact that he was the finance minister from 11 April 2022 till 27 September 2022 and therefore in a unique position to be aware of data that may not have been shared with the general public.
No economist would argue against his recently published critique: “large and persistent difference between the open market and the interbank exchange rates…suggests that the State Bank is informally guiding banks on the exchange rate. The large difference is also detrimental to our exports and remittances and is encouraging imports…Surely the number one priority of the finance minister should not be to make imports cheaper and export harder, which is what an appreciated rupee does. We have been down this road before in 2007-8 and 2017/18, without any joy.” Exchange rate manipulation has been the hallmark of Ishaq Dar’s tenures as finance minister, a severely flawed policy, though Nawaz Sharif during his interactions with the media constantly cites the rupee-dollar parity as a measure of PML-N’s better performance in comparison to other administrations’.
Ismail in his recent articles also highlighted the need to increase outlay on education and argues “if there are 2.2 million shops in Pakistan and only 30,000 pay income tax is it not fair to ask them to pay just 30,000 rupees per month?” He further observed, again with a great deal of credibility, that “since our elite already control most of our resources they aren’t interested in economic growth or increasing the size of the pie. Their preoccupation is maintaining their lion’s share of the pie. Our governments’ ineffectiveness serves our elite well as it stops any social mobility and preserves the status quo. Finally, the import substitution policy ensures that monopoly profits flow to the already well-off.” This ineffectiveness, Ismail supporters claim, was due to Dar’s pervasive influence over all policy measures from London however he must answer two decisions that cannot be attributed to Dar: (i) his failure to mention the devastating floods in the Letter of Intent that was finalized on 16 August for the seventh/eighth review, an inexplicable oversight. Even if the IMF had advised to wait till after the needs assessment was completed by the World Bank yet one would have hoped that a mention had been made at a time when the government was proactively engaged in seeking climate change justice for the country; and (ii) he was accused of conflict of interest when he decided to slash customs duty from 11 to 3 percent on flavouring powders for preparations of food (HC Code 2106.9030) which could benefit his family business. If as he privately claimed the target of this reduction was another company yet even one-rupee benefit to his family business would legitimately raise questions.
Any attempt to change the elite status quo in Pakistan has been forestalled by first the threat of crippling strike action and, if ignored, followed by making good on the threat. To break this cycle would require taking on the unions by law enforcement agencies on the pattern set by Margaret Thatcher in the 1970s though strikes by public sector unions in the UK have resurfaced recently as incomes continue to erode. In this context Ismail’s doctorate in public finance is not likely to pay dividends especially with party leadership averse to taking on the powerful unions, that in Pakistan are disturbingly not limited to the public sector but are spread across the elite in the privately operated manufacturing sector. However, with all sectoral inefficiencies being passed onto the common man (in terms of utility tariffs) to achieve full cost recovery and relying on low hanging fruit in terms of tax collections (reliance on indirect taxes and petroleum levy) the boiling point of public discontent may be reached sooner rather than later.
What has angered Dar about Ismail’s recent diatribes the most is the following warning: “today our default risk has climbed again and reached dangerous levels. This risk won’t vanish even after the December bonds are paid off. At the risk of sounding an alarm, I have to say that we have no room left for error. Concrete measures that reassure markets and lenders are urgently needed. There comes a time when national interest must prevail over political interest. This is that time. This government will have no right to criticize PTI or anyone else if, having eagerly decided to come to power, it is unable to do so.”
The country’s foreign exchange reserves as of 2 December are 6.7 billion dollars, and one would have to go back to January 2019 to match this low figure when the Khan administration went on the Fund programme and pledged very tight monetary and fiscal policies which if implemented would have reduced the growth to 1.5 percent with 13 percent inflation for 2019-20. In November 2022 inflation was nearly double at 23.8 percent, and policies that violate the IMF prior conditions as well as its policy thrusts have delayed the ninth review talks and include a 100 billion rupee unfunded subsidy package for exporters (19.99 rupees per unit of electricity), a 1.8 trillion rupee agricultural package (with an overwhelming focus on credit that is going to be inflationary after output contracts due to tight monetary and fiscal policies), a 16 percent discount rate that is a mere 1.4 percent higher than core inflation and 7.8 percent lower than headline inflation.
Not true Dar and the Governor State Bank of Pakistan have repeatedly stated with the country clearing the one billion-dollar bond payment this month. But as mentioned in the IMF’s seventh/eight review documents administrative and exchange measures are in place, there are limitations on advance payments for imports against letters of credit and advance payments up to the certain amount over invoice (without LCs) for the import of eligible items, while repatriation of fares by foreign airlines and repatriation of profits by foreign companies are lagging behind which technically may not be default but which almost certainly shows an extreme economic ill health.
To conclude, Pakistan has been extremely unfortunate in our finance ministers, who with or without academic qualifications, either did not have full party backing or limitations were placed on them by powerful stakeholders (both within the party, the institutions and the elite) to take out-of-the box decisions and who displayed little backbone to challenge these limitations by resigning.Anjum Ibrahim, "PML-N versus PML-N," Business recorder. 2022-12-12.
Keywords: Economics , Fragile economy , World Bank , Monetary fund , State Bank , Miftah Ismail , Ishaq Dar , Nawaz Sharif , Pakistan , England , PMLN , IMF