Shehbaz Sharif won two more votes than the required 172 to become the country’s Prime Minister on 11 April and has ever since struggled to not only convince his own party leader and brother Nawaz Sharif to provide the support he needs to deal with multiple crises but is also engaged in a tug of war with a host of stakeholders – ranging from friendly coalition partners who nonetheless have definite views on why politically unpopular economic decisions must not be taken to the looming prospect of President Alvi of the Pakistan Tehreek-e-Insaf (PTI) asking him to seek a vote of confidence as and when instructed by the party chair, Imran Khan.
Institutional stakeholders are also increasingly visible within this milieu and are reportedly insisting that the current dispensation has been given the opportunity to reverse the unilateral electoral reforms announced by the Khan administration that they had claimed would give him an unfair advantage in elections — electoral voting machines and allowing the overseas Pakistanis to vote in the constituency they left from – but insist that bold economic decisions must be taken immediately and early elections announced (within three to upwards of five months).
Recent judicial decisions have further undermined Shehbaz Sharif’s comfort level in not only getting a vote of confidence but also to make transfers/postings of staff, regarded as an executive prerogative by previous governments.
Two prevalent factors are being ignored. First, suspension of the pledged external inflows due to the delay in the success of the International Monetary Fund’s (IMF) seventh review (whose success is contingent on deciding to withdraw the 28 February relief package).
In the event that the review is successful macro-economic fundamentals will not stabilize over-night though some time for implementing much needed reforms would be gained. Thus in either case major economies would have to be implemented on not only the usual suspect, Public Sector Development Programme with implications on growth, but also on the budgets of all major recipients of current expenditure, including defense.
And second, there are serious domestic resource constraints, which together with inflation, would make coughing up around 500 billion rupees for elections a challenge - a conservative estimate given that the 2018 elections cost the country 440 billion rupees.
That the economic impasse has reached a critical mess is not in question. Subsidies on petroleum and products and electricity (announced on 28 February) as well as on essential food items, once extended, are well-nigh impossible to withdraw for any political government. And yet in spite of daily verbal sparring between the PTI and the coalition partners on all matters — be they in the political or economic arena — one may assume that if in government the two protagonists would think alike on two counts.
First, there would be agreement that there is an emergent need for the success of the seventh review of the International Monetary Fund (IMF) under the ongoing 6 billion dollars Extended Fund Facility programme and to augment the programme amount and phase out the harsh conditions.
While in-country debate is focused on the economic need to withdraw the 28 February relief package on petroleum and products and electricity rates, reportedly a stumbling block in the success of the seventh review to date, yet what is telling are two statements, made eleven days apart, by the previous Finance Minister Shaukat Tarin.
On 10 March, Tarin is quoted as having stated that “the IMF should not worry about it as neither we will take any loan nor increase our fiscal budget to manage the subsidy, but the required money would be managed by diverting dividends from shareholdings in state-owned enterprises (SOEs), cutting development funds from Public Sector Development Programme (PSDP), and additional revenues collected during current fiscal year, while some of the funds would be diverted from Ehsaas Programme.” By 21 March he stated “first they (IMF) agreed that the financing for such a relief package is available through the provinces and SOEs and secondly now they are verifying whether these agreements exist or not. My final meeting with the IMF staff is expected on Tuesday (tomorrow) and then the memorandum of economic and financial policies (MEFP) will be finalized.”
The seventh review remains suspended to this day reflecting the fact that Tarin failed to convince the Fund staff of the implementability of his funding proposals.
The SOEs have been unable to release dividends due to severe liquidity issues reflected by the rising circular debt (from 1.2 trillion rupees in 2018 to over 2.5 trillion rupees today), the additional revenue collected referred to by Tarin was in addition to the previous year and not in addition to what was budgeted, and the provinces would be unable to support the subsidy package as even the current year’s budgeted provincial surplus of 570 billion rupees, announced before the subsidy package, is unlikely to be met given that bafflingly it was more than doubled from the previous year’s 242 billion rupees.
Provincial surplus was budgeted after the reduction in revenue of the federal government under the 2010 National Finance Commission (NFC) award. And while Dr Hafeez Sheikh irresponsibly and untenably agreed to revisit the provincial and federal resource distribution with the Fund in 2019, a pledge clearly violative of the constitution, yet it is time not to rely on projecting an unrealistic higher provincial surplus to meet the federal budget deficit but to focus on: (i) raising the tax to GDP ratio by one percent each year as envisaged in the 2010 accord that was projected to raise revenue to meet the federal government’s rising financial requirements; and (ii) devolve subjects that were to be devolved as per the eighteenth constitutional amendment that remain pending to this day.
Once the seventh review is declared a success by the IMF it would imply pledged inflows from multilaterals/bilaterals would be restored and the cost of debt equity (through issuance of Sukuk and Eurobonds) would be manageable – inflows that would stabilize the rupee.
Second, the relief package was to be effective for four months and is nearing the end of its effectivity date of 30 June 2022. However, whoever announces its withdrawal will face severe public criticism with a significant fallout on political fortunes.
Shehbaz Sharif government seeks an assurance of at least a year in power to overcome the expected public discontent through prudent monetary and fiscal policies, arguing that the relief package was economically unfeasible due to poor macroeconomic fundamentals and was violative of the pledges made to the Fund in the previous review. The previous government blames political uncertainty due to the Shehbaz Sharif-led government. The situation is somewhere between these two extremes.
To conclude, the economy today requires not only reliance on conventional external creditors — multilaterals/friendly countries/a rating that would determine the cost of equity borrowing and from commercial banks abroad — but some bold out of the box decisions particularly a reduction in current expenditure, a fiscal policy not focused on total revenue collected but targeting the elite and a discount rate linked to core as opposed to Consumer Price Index.
Copyright Business Recorder, 2022