EDITORIAL: Fawad Chaudhary, the Federal Minister for Information and Broadcasting, in his first interaction after the local bodies elections held in Khyber Pakhtunkhwa (KPK) on Sunday, lamented yet again the flawed policies of the past claiming that 55 billion dollar loans acquired by the Khan administration’s predecessors would have to be repaid during its five-year tenure and disparaged the power generation plants established by previous governments at unfavourable terms to the country — on imported fuel, at capacity payments payable in dollars. Notwithstanding these inherited issues, the economy is on a growth trajectory, he said, citing the rise in IT exports, cars/motorcycle sales, agricultural crops output. According to him, “if the economy is going down then how are these sectors showing growth?”
Sadly, the minister did not dwell on the issues that face the country’s economy and more particularly those that impact on the common man that almost certainly contributed to the party’s poor performance in the KPK local bodies’ elections. First and foremost, inflation remains a source of serious concern to the general electorate which is not reliant on government data or claims that Pakistan is the “cheapest” country in the world or that the rate has come down by a percentage point or two in a week. Householders will make their own assessment as and when they go to the market and are subjected to ever-rising prices in the market from one week to the next. To make matters worse the government’s failure to undertake structural reforms in the power sector, like its predecessors, remains the major impediment to its ability to attain full cost recovery, a primary objective of the International Monetary Fund (IMF), leaving it with little option but to pass on sustained sectoral poor performance onto the general public through ever-rising utility rates. Tax structure also remains largely unchanged — unfair, inequitable and anomalous — prompting the government, again like its predecessors, to rely on the low hanging fruit — higher indirect taxes whose incidence on the poor is greater than on the rich, including ending exemptions (which implies the levy of 17 percent sales tax on multiple items).
While the cabinet as per Fawad Chaudhary did not discuss the IMF’s prior conditions which include the cabinet approval of the money bill seeking to end exemptions of 330 billion rupees before being submitted to parliament, likely to meet severe resistance from the opposition as well as many from the treasury benches who may deem it more prudent to remain away from parliament, yet failure to meet the Fund’s prior conditions would imply a rise in the interest payable on borrowing from abroad which as per Fawad Chaudhary is around 12 billion dollars this year and another 12 billion dollars next year. One can only hope that political compulsions are not allowed to predominate yet again at the cost of economic considerations.
The claims of the economy performing well indicate that Fawad Chaudhary was not briefed appropriately by his colleagues in the Finance Ministry given that: (i) the country’s total foreign debt was 95 billion dollars in 2018-19, a high no doubt due to Ishaq Dar’s flawed policy to raise reliance on external borrowing premised on the economically unsound rationale that the interest rate is lower abroad relative to the domestic market while keeping the rupee grossly overvalued — a policy that led to eroding exports and once the rupee was allowed to depreciate to its actual value led to a ballooning in the annual markup. It is important to note that today total external debt is 126 billion dollars according to government figures shared in parliament. The minister would do well to explain why total external borrowing has increased by 31 billion dollars in just three years instead of declining if the government borrowed only to repay past loans. Additionally, the G-7 countries have provided debt relief to debtor countries due to Covid-19, a relief that Pakistan has taken for the second consecutive year, implying deferment of interest and principal payable as and when due for two of the three years that the Khan administration has been in power; (ii) domestic debt, a highly inflationary policy has risen from 16.5 trillion rupees at the time Imran Khan became the Prime Minister to a whopping 26 trillion rupees today — a historic high that requires an urgent revisit. In addition to raise the discount rate to 9.75 percent and claim it’s the boldest policy rate decision in Asia is baffling as this would raise the cost of borrowing by the government, a major borrower in the market; (iii) State Bank of Pakistan as well as the government is claiming success in advancing cheap/free credit without collateral to small and medium enterprises and poor farmers with the objective of achieving pro-poor growth rate; however, this policy not only presents a serious financial challenge to domestic banking sector but also is highly inflationary as liquidity is rising without a commensurate rise in output at least at present. It also bears thinking that in the past such cheap credit schemes failed as they were hijacked by the influentials though one would hope that all these lacunae can be overcome. However, cheap/free credit may well account for private businesses rising by 44 percent with 140,000 registered with SECP (Securities and Exchange Commission of Pakistan) in the last two years as noted by Chaudhary. In addition, exports are at present under threat due to severe gas shortages with the textile sector claiming that they would be lower by at least 2 billion dollars than projected; (iv) foreign exchange reserves are high but more than 50 percent are debt-based — swap arrangements as well as issuance of debt equity through sukuk/eurobonds; besides the existing reserves have not been able to arrest the steady rupee decline — yet another reason for inflation; and (v) growth appears at present to be consumption-driven rather than production-driven — a common enough factor evident globally after the lifting of lockdown.
Imran Khan was elected prime minister on the pledge that he will always be honest with the general public but unfortunately the latest press conference by his Minister for Information leaves this pledge severely compromised.
Copyright Business Recorder, 2021