Whither the economy?

The cabinet approved the medium-term strategy paper this Tuesday past and projected a Gross Domestic Product (GDP) growth of 4.2 percent, inflation of 8 percent and fiscal deficit of 6 percent, for next fiscal year. The first two numbers match the International Monetary Fund (IMF) projections of 4, and 8 percent however the Fund has projected a budget deficit (including grants) of 5.6 percent and 5.5 percent (excluding grants) for 2021-22.

These numbers if achieved by end of 30 June 2022 would herald the dawn of an economically viable Pakistan with the majority of the voting public convinced of the veracity of the government’s narrative notably that the first three years of the Khan administration were spent on turning the economy around from massive mismanagement and corruption of the past. The thrust of this argument is evident in the Fund’s April 2021 document titled Second, Third, Fourth and Fifth Reviews Under the Extended Arrangement Under the Extended Fund Facility and Request for Rephasing of Access in which it argued: “an upside for growth and program objectives arises from the political calendar: with the senate elections having taken place in March 2021, there is a window to accelerate reforms until the general elections scheduled for August 2023.”

The first part of this sentence may be challenged on the grounds that the senate’s constituency is limited to parliamentarians who have shown a singular lack of empathy with the public in policy making. This has been repeatedly emphasized by Prime Minister Imran Khan but without any supporting data however corroborating data was released by the United Nations Development Programme (UNDP) a couple of weeks ago: the corporate sector and landlords (who constitute 1.1 percent of the population but own 22 percent of all arable farmland) have strong representation in parliament and in effect are responsible for doling out privileges and receiving them. Pakistan’s elite (corporate sector, feudal landlords, politicians’ and military) receive an estimated 17.4 billion dollars with the corporate sector alone accrued a total of 4.7 billion dollars in privileges ranging from tax breaks, cheap input prices, higher output prices, preferential access to capital land and services (elements that remain evident to this day).

Be that as it may, it is likely that such an argument was put forth by the Dr Hafeez Sheikh-led Finance Ministry who was a candidate for the senate elections at the time and facing criticism by the Pakistan Tehrik-i-Insaaf parliamentarians and coalition partners that they were unable to face their constituents due to the unchecked rise in prices and, perhaps, what galled them the more was his arrogance in not giving them time.

The window to accelerate reforms referred to by the Fund was partially opened by the administration (as a component of prior conditions of the Fund before disbursement of the 500 million dollars): (i) a raise of 1.95 rupees has already been implemented and an additional raise of between 4 to 5 rupee per unit till end 2021 has been agreed that includes the pledge under the Circular Debt Management Plan to bring it down to zero (which is unrealistic in the period envisaged given that it has reached 2.3 trillion rupees). This could possibly generate a window for negotiating lower rates. Reports also indicate that there is a suggestion to reduce the tax on electricity though that would compromise the revenue generation. The government has reportedly already contacted the Fund and World Bank (the lead player in the energy sector) for relief for the consumers facing the onslaught of the third Covid-19 wave and in return has been tasked to prepare another viable time-bound plan for their review and approval; it is unlikely that any plan would meet with the approval of the multilaterals that seeks to extend the conditions beyond September 2022 (the scheduled last quarterly review of the programme) which would bring it closer to the election day; and (ii) the Income Tax amendments which are projected to generate 140 billion rupees but which as per Federal Board of Revenue (FBR) officials is unlikely to generate no more than 30 to 40 billion rupees. This implies that the shortfall this year would be more than projected which would make the implementation of next year’s targets even more of a challenge.

Hence shortfalls from what was agreed by Dr Hafeez Sheikh and Dr Reza Baqir in February 2021 would be close to one trillion rupees and therefore a major issue in negotiations for recalibration with the Fund. In addition with considerable disparity in GDP projections for the current fiscal year between the government and the Fund (3 percent by Governor State Bank of Pakistan and 2.9 percent by the government against 1.5 percent by the IMF) the revenue projection for this year and the next year (comparable at present) may be compromised as would the projections of all other key macroeconomic indicators (calculated at a percentage of GDP) thereby compounding the pressure on the government to hasten the reform process or else face suspension of the Fund programme.

Inflation as per the monetary policy statement dated 19 March 2021 would be on the upper side of the previous projection of between 7 to 9 percent and argues that “looking further ahead, this year’s upcoming round of wage negotiations, next year’s budget, and the path of domestic energy prices and international commodity prices may have an important bearing on the inflation trajectory.” Interestingly, none of these factors are under the control of the SBP which is yet another argument against giving the SBP’s primary objective as price control as per the amended State Bank Act approved by the cabinet though not yet by parliament. The consolidated inflation for the year by the Pakistan Bureau of Statistics has not yet been projected though it was calculated at 9.1 percent in March 2021, up from 5.7 percent in January, a figure dismissed as unrealistic as it did not match the weekly sensitive price index trend.

It is a safe assumption that all these projections were prepared prior to 29 March 2021 when Hafeez Sheikh was dismissed. His modus operandi in strategy papers and budget documents since the staff level agreement was reached with the Fund on the Extended Fund Facility programme on 12 May 2019 was to accept all conditions – unrealistic as well as those implementable and to rely on: (i) seeking a waiver in a subsequent quarterly review by preferably citing external mitigating factors compromising the attainment of a time-bound target or structural benchmark; the pandemic provided him with the perfect excuse on which to lay the entire blame for the persistently poor macro-economic indicators other than the current account deficit; and (ii) in the event that the Fund staff were not entirely convinced Sheikh would claim that the revenue shortfall would be met by a commensurate rise in non-tax revenue (in 2019-20 SBP profits rose to 1.16 trillion rupees against the budgeted 406 billion rupees and the revised estimates of 785 billion rupees) – a condition not likely to be repeated; however prior to his dismissal Sheikh while chairing meetings of the Privatisation Commission routinely urged the process to be speeded up, a directive that was unlikely to be implemented given the onslaught of the third Covid-19 wave.

So what would Sheikh’s successor Shaukat Tarin do? He has already stated that raising electricity tariffs would burden not only households but also the productive sectors with implications on employment and emphasized the need for a public sector led growth with higher outlay on public sector development programme. True but he is between a rock and a hard place: if he negotiates phasing of the harsh conditions then the Fund may extend the date of the scheduled last quarterly review (2 September 2022) which would bring the end of the programme dangerously close to the elections (in August 2023).

Copyright Business Recorder, 2021