Caretakers and economic management

Caretaker Minister for Information for Water and Power, Ali Zafar, set the tone for his maiden press conference with Caretaker Finance Minister Dr Shamshad Akhtar by stating at the outset that the cabinet had agreed not to criticise past policies to forestall any appearance of taking sides. With this objective in mind, he stated that all bottlenecks with respect to generation, technical issues as well as lower than capacity hydel generation at present due to the prevailing water crisis in the country, are expected to be removed shortly. At the same time, demand rose sharply due to prevailing hot weather conditions which accounted for considerable load shedding. However, he did acknowledge that little was done to improve the outmoded distribution and transmission network which continues to constrain delivery of electricity to end customers. Ali Zafar did not dwell on the over one trillion rupee circular debt as a contributory factor to a severe liquidity crisis in all energy sub-sectors leading to electricity shortages that, without periodic extra-budgetary injections into Pakistan State Oil, have compromised the country's capacity to import fuel to run the generation plants for at least a decade.
Dr Akhtar, while explaining the recent rise in petroleum prices no doubt after severe public criticism, noted their price regulatory mechanism is institutionalized with Oil and Gas Regulatory Authority (Ogra) making a monthly recommendation to the government based on a specific formula. It is the government's decision to pass the total impact of price changes or a part thereof to consumers by adjusting the multiple taxes levied on POL products. Any attempt to lower taxes (to appease the public) would have negative implications on revenue collections and given that June is the last month of the fiscal year any decline in projected collections from the energy sector cannot be made up through the levy of other taxes and lead to a higher deficit than budgeted which, in turn, will have serious inflationary consequences. Dr Akhtar noted that the government decided to pass on only 50 percent of the rise in the international price to domestic consumers which implies that the government would take a hit of 6.5 billion rupees per week in terms of lower revenue collections under this head alone.
As a natural adjunct to the recent oil price rise Dr Akhtar then proceeded to talk of the fiscal deficit which she maintained had crossed the 6.1 percent mark against the budgeted target of 4.1 percent. However, the Abbasi-led administration had projected a deficit of 5.5 percent in the budget presented on 27 April 2018 and the rise in the deficit of 0.6 percent is extremely disturbing after six weeks and three days, assuming that Dr Akhtar presented the data valid up to 12 June 2018. It is even more disturbing given that another two and a half weeks remain for the end of the fiscal year with the finance minister expressing her inability to project a deficit till 30 June 2018.
She also noted the unsustainable debt to Gross Domestic Product (GDP) ratio that has risen to 70 percent in 2018 compared to 64 percent in 2013. In the last week of April, a Business Recorder exclusive, not challenged, stated that the Ministry of Finance acknowledged to the federal cabinet that debt to GDP is 70.1 percent with the target of 60 percent set by the Fiscal Responsibility and Debt Limitation Act 2005 unlikely to be achieved. The country will not default under the caretaker setup she categorically stated no doubt easing fears of our international creditors; however, she did note that it would require long-term measures which obviously constrains the caretakers.
The widening current account deficit is also a source of concern and the recent rise in exports is not enough to meet the rise in imports which is depleting foreign exchange reserves at a much faster pace. She mentioned the fallacy behind a policy to have a strong rupee through market intervention, in practice for four years during the Ishaq Dar-led Finance Ministry, by stating an economic truism known even to a freshman economic major, "if you want to stabilize exchange rate for the long-term this can be done by foreign exchange reserve injections in the inter-bank market which is not sustainable."
With these rather disturbing elements in the economy, it is little wonder that in an attempt to balance the picture and not be seen as partisan by the PML-N she mentioned a growth rate of 5.8 percent and a healthy growth in various productive sectors, including industry and services sector. This no doubt raised the ire of Asad Umer, the man hopeful to succeed Dr Akhtar as the country's finance minister, who hastily called a press conference and stated that the cabinet ministers appeared to be supporting the PML-N in their assessment and demanded that the caretakers "present the full facts about the state of the economy amid declining foreign exchange reserves, and even though it was not their responsibility to hold talks with the International Monetary Fund, it is imperative to bring a policy as a way forward for the next government."
While the caretaker finance minister did identify all critical issues facing the economy, yet one would have hoped that she had taken the time before her maiden press conference (in her capacity as the finance minister) to impartially evaluate Pakistan Bureau of Statistics (PBS) data. Even a cursory look at the data reveals obvious discrepancies and a lack of rationalization with data released by other government ministries/departments as well as that released by credible industry sources. While she has held the portfolio for too short a time and, additionally, has been overwhelmed by the need to focus on fire fighting to turn her attention to data manipulation by PBS, however, continued failure to do so would disable her from taking informed decisions. And if she faces time constraints then perhaps she can engage well respected independent economists who have been presenting alternate credible data and who maintain that the GDP growth for the current year is no more than 4.4 percent (instead of 5.8 percent), fiscal deficit is projected at 7.4 percent and total public debt as a percentage of GDP is 75.3 percent (with the lower rate of 70 percent due to a redefinition of the debt by Ishaq Dar).
Asad Umer's request for a policy paper to provide guidance to the next government is an appropriate request though one doubts if a comprehensive paper can be prepared within the next five weeks or so as elections are scheduled for July 25. In the event that his ambition is realized and he is the country's next finance minister then he does have the option to engage economic experts to provide him guidance on those matters where the requisite expertise and experience is lacking. Running a mega industrial unit and articulating/implementing a country's economic policies are two different things.