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The marriage between economics and politics

The marriage between politics and economics is well established in democracies as well as autocracies, giving rise to not only the need to meet the basic needs of the general public, with the objective of ensuring the sustainability of the government, but also the eruption and, over time, consolidation of “influencers” of policy decisions referred to as the mafia by Prime Minister Imran Khan.

In Pakistan an additional element in this marriage is the capacity to launch violent street protests, irrespective of the merits or demerits of the protest, which in nine times out of ten instances, has prompted the abandonment of policy or an earlier government stance. Depending on the timing of the elections and/or the spill-over effects of protests, these proceedings maybe prompt or drawn out which determines their impact on the economy, however sadly they have been visibly successful in compelling the government to back down.

Instances of the government, federal and/or provincial, quickly backing down are numerous ranging from lawyers’ rampage against a sitting judge/police/doctors, doctors rampage for salaries commensurate with inflation, protests by economically powerful pressure groups – exporters, industrialists, or traders against the levy of a specific tax, opposition-led or spontaneous protests against inflation, as well as protests by political parties/religious groups. There are also angry spontaneous protests by the relatively disadvantaged groups as the only recourse available to compel the administration to listen to their legitimate demands. A recent example was the family of Nazim Jokhio blocking a thoroughfare that prompted the accused in his gruesome murder, Sindh MPA Jam Owais, to surrender to the Malir police – a murder that was allegedly for recording Owais’s hunting expedition of houbara bustard. Another is the January 2019 massacre of a family including the husband, wife, their 13-year-old daughter and neighbour at a toll plaza in Sahiwal while three underage children watched.

This week past, subsequent to the recent rise in petrol rates that followed a rise in electricity tariffs as well as in the price of sugar, wheat and cooking oil, there is widespread public discontent. Unfortunately, the Khan administration’s narrative of blaming previous administrations is severely compromised with the start of the fourth year of its five-year tenure for three reasons.

First, the Prime Minister claimed that the rise in taxes on petroleum and products is necessary to meet the budgeted revenue targets. True but all Pakistani administrations have contended with sustained lack of fiscal space. This has come to mean that those who should pay income tax do not, and in this category one may include the rich landlords heavily represented in the country’s assemblies who have successfully resisted a constitutional amendment to allow the federal government to impose a tax on their income at the same rate as applicable on the salaried; while provincial assemblies have displayed little gumption to tax them appropriately. Others including wholesalers/traders do not file returns and therefore are not eligible to pay income tax. Add electricity sector mismanagement, responsible for 2.4 trillion rupee circular debt today and one would get some idea of why government after government needs an International Monetary Fund (IMF) loan. In Pakistan’s 74-year history we are on to the 23rd on average three year Fund programme. In addition, there has been a massive unprecedented rise in current expenditure – from 4.29 trillion rupees in 2017-18 (inherited by the government) to 7.5 trillion rupees in the current year’s budget which reflects poor economic policies at best or profligacy at worst.

Second, the claim that rupee erosion is due to speculators, Afghanistan situation, etc. Pakistan is following a market determined exchange rate which as per the IMF website implies that the State Bank of Pakistan must exercise judgment to determine whether the existing macroeconomic indicators justify an intervention or not and this judgment needs to be questioned as allowing the rupee to depreciate reflects a complete lack of empathy with the public. In the week past the rupee stabilized due to Saudi Arabia’s decision to extend a 3 billion dollar loan and 1.2 billion dollars in deferred oil facility however these amounts are returnable.

And finally, extending a relief/subsidy package which the government can ill afford and which is injecting more money into the system than is not backed by a rise in productivity will be inflationary. The government has been linking growth to output in 2020-21 however ignored is the fact that consumption rose last year, the main driver of growth, a usual condition after a lockdown, and Shaukat Tarin’s optimism may be misplaced.

The difference between the 2019 programme loan and the 2008 and 2013 programmes is three-fold. First, the Fund insisted on upfront harsh conditions by citing the previous track record of not implementing economic reforms once the fiscal space was no longer required. Second and perhaps most pertinently a change in geopolitical considerations of the US led to withdrawal of US active support that in the past had successfully pressured the IMF to phase out politically challenging conditions. And last but certainly not least, the Fund envisaged not only roll-over of all loans by friendly countries but also a total of 38.5 billion dollar external loans till the end of the thirty nine month programme period. These conditions were accepted by the Khan’s economic team and he has to bear responsibility for their fallout on the poor.

To conclude, the issue of fiscal space must be resolved not by adding onto expenditure but through mercilessly slashing its expenditure. Administration after administration claims an austerity drive however the fact of the matter is that current expenditure has been steadily rising – be it under the head of subsidies, or be it under the head of Ehsaas programme or be it under the head of loans procured by previous administrations which has become due today. Without taking these politically difficult decisions it is extremely doubtful if any government will be able to take the country towards sustainability – be it of the political or economic system.

Anjum Ibrahim, "The marriage between economics and politics," Business Recorder. 2021-11-08.
Keywords: Economics , Economic system , Monetary fund , State Bank , Macroeconomic Democracies , Imran Khan. Jam Owais , Shaukat Tarin , Nazim Jokhio , Pakistan , MPA , IMF

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