EDITORIAL: The PML-N (Pakistan Muslim League-Nawaz), occupying nearly all economic-related ministries, barring commerce and industries and production – with both highly dependent on finance for launching any programme - have been reiterating since April, that their taking economically extremely challenging decisions, necessitated by the state of the economy they inherited, has cost them considerable popular support.
The announcement of the relief package on 28 February 2022 by the then Prime Minister Imran Khan, envisaging a 10 rupee per litre reduction in prices of petrol and diesel at a time when the international prices of oil were rising daily due to the Russia-Ukraine war and freezing these rates till end June 2022 as well as a 5 rupee reduction in electricity was a violation of the International Monetary Fund (IMF) agreement which translated in the failure of the then Finance Minister Shaukat Tarin to reach the staff-level agreement with the International Monetary Fund (IMF) on the due date.
That task fell to the newly-appointed Finance Minister Miftah Ismail who was unable to get the cabinet to agree to withdrawal of the relief package for around six weeks with the first phase of the withdrawal effective 28 May followed by the second phase withdrawal on 3 June.
Foot-dragging on other measures included delays in raising electricity rates and abolishing subsidised electricity rates to the five export sectors; however, Ismail reportedly convinced the cabinet that any attempt to raise the subsidy to exporters with respect to electricity tariff could not be extended beyond three months of the current year (because only 20 billion rupees had been budgeted under this head) due to pledges to the Fund.
On the monetary policy side, pledges to the Fund included a positive policy rate (or a couple of percentage points higher than core inflation at least though the previous Governor State Bank had pledged linking it to the much higher Consumer Price Index) and allowing for a market-based exchange rate.
Ismail was forced to capitulate on all the measures dictated by the Fund because of the 21 billion dollars required for debt service payments and principal repayments as and when due, 4 to 5 billion dollars to strengthen the foreign exchange reserves that at present are under 8 billion dollars, a similar amount to meet the current account deficit and around 8 to 10 billion dollars to meet the budget deficit largely attributed to current expenditure. In this context two observations are relevant.
First, that the delay in meeting the conditions caused a worsening of the economic indicators necessitating even harsher conditions than were agreed with the Khan economic team leaders is a fact; and second, Ismail reportedly did not mention the floods in the letter of intent he submitted in middle of August – an omission being linked to awaiting the needs assessment by the lender agencies. It is important to note that there was a need to highlight the scale of the devastation even if resisting overstating the extent of the damage.
The entry of Ishaq Dar as the Finance Minister with reportedly an overarching objectives to contain the weakening rupee-dollar parity coupled with his party’s resistance to widen the tax net to include traders/wholesalers while bringing inflation down to single digit required out of the box solutions that have so far not been formulated leave alone implemented.
Dar has extended subsidy to exporters for the rest of the year, 19.99 rupees per unit against 40 rupees per unit to non-vulnerable householders, at a cost of 100 billion rupees to the exchequer, which has already been criticised by the Fund as being regressive and could well be one of the reasons for the delay in the start of the ninth review that has just commenced virtually.
Another reason could be the failure to implement power sector reforms other than to raise tariffs for households. Today the heaviest burden on the treasury is the 2.4 trillion rupees power sector circular debt that continues to cripple the economy. Moreover, state-owned entities, including those in the power sector, requiring massive budgetary injections continue to plague the hapless people of this country.
And finally, the tax structure continues to be unfair, inequitable and anomalous and heavy reliance on indirect regressive taxes continue with direct taxes overstated by inclusion of withholding taxes levied in the sales tax mode. Needless to add the Auditor General of Pakistan in its report has urged FBR to desist from this practice.
Challenging reforms have yet to be implemented. Not only has the government continued to employ administrative and exchange restrictions to contain the current account deficit, it has also failed to slash current expenditure and instead raised it by raising subsidies; and last but not least, the revenue collections are expected to fall short of targets which would, as per the previous Fund review, trigger contingency measures that require a mini-budget.
One can only hope that the Finance Minister is aware that any delay in the reforms would worsen the situation leading to even harsher conditionalities by the Fund - an element that his two predecessors also experienced.
Copyright Business Recorder, 2022
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