The damning indictment of Pakistan’s economic policies continues with the latest attack by Managing Director International Monetary Fund (IMF) Kristalina Georgieva who stated in an interview to Deutsche Welle on 19 February 2023 that: “I want to stress that we are emphasising two things. Number one, tax revenues.

Those who can, those that are making money in the public or private sector need to contribute to the economy. Secondly, to have a fairer distribution of the pressures by moving subsidies only towards the people who really need it.”

This damning indictment from the head of a multilateral with which Pakistan’s economic team is currently negotiating on the pending ninth quarterly review was inexplicably ignored by Finance Minister Ishaq Dar the next day while addressing parliament subsequent to the passage of the mini-budget.

Instead he referred to PricewaterhouseCoopers’ (PwC’s) report dated February 2017 (Dar held the finance portfolio from June 2013 till his summary departure on 22 November 2017) titled “The Long View – How will the global economic order change by 2050” in which Pakistan economy was rated 24 globally while today it is in 47 position.

Three observations are in order: (i) The Long View focused on purchasing power parity that requires an adjustment of price differentials between countries - in other words, the value of goods and services are reflected in local currency and then converted into dollars.

The exchange rate was grossly overvalued in 2017 due to Ishaq Dar’s preferred but extremely flawed policy of overvaluing the currency. This was acknowledged by the IMF in a footnote of a quarterly review of its then ongoing programme that the rupee was overvalued from between 5 to 20 percent – a wide range that compels one to marvel at the Fund staff’s capacity.

Be that as it may, The Long View also noted that Market Exchange Rate (MER) provides a better measure of the value of goods and services produced in an economy which implied converting a country’s GDP calculated in the local currency to the US dollar based on market exchange rates; Pakistan was ranked 28 in 2017 for the same reason - the rupee was deliberately overvalued and therefore Pakistan got a higher ranking; (ii) Dar’s silence on the pandemic that faced the country (February 2020 till end 2021) is maybe justifiable from the perspective of an accountant but certainly not an economist; and (iii) the PwC never did a follow up on the publication The Long View that may well indicate its ownership of the projections that were made by its team. PwC does however routinely undertake a global annual review with projections limited to the year in question.

In several countries around the globe Finance Ministers are appointed who may not have the requisite academic qualifications but to be successful they must have the capacity to entertain recommendations by those who have the necessary qualifications/experience, acknowledge past mistakes and learn from them and last but not least have the political clout to sell policies that maybe politically extremely challenging.

Thus while UK’s Liz Truss was quickly unseated as the prime minister due to policies of her finance minister that were not acceptable to the party leadership or the general public the same has, sadly, never applied to Pakistan which accounts for the current impasse.

The last four finance ministers (including the incumbent) this country has been subjected to were all repeat performers – Hafeez Sheikh (twice with two different political parties), Shaukat Tarin (twice under two different political parties), Miftah Ismail (twice with the same party though always in an interim capacity) and Ishaq Dar (thrice but with the same party). This leads to the obvious conclusion that Dar is the only one amongst the four with the necessary clout within his party to bulldoze politically challenging decisions.

However, as his recent statements indicate Dar has not only not acknowledged his past mistakes, but continues to tout them as major successes - a contention that is reflected in three extremely flawed decisions post-dating his return end-September 2022 after an absence of five years: (i) controlling the interbank rate, (ii) extending electricity subsidy to the wealthy exporters under the guise of promoting exports with no empirical evidence that the two are linked while 33 million flood victims remain in need of assistance; and (iii) a farm package envisaging subsidies and loans without ensuring that these are dedicated to the subsistence level farmers especially hit by the floods.

These three policies’ contribution to inflation is evident in data released by the Pakistan Bureau of Statistics: headline inflation rose to 25.1 percent July-November last year against 9.3 percent in the comparable period of the year before (well before the Khan administration’s unfunded relief package was announced) and registered 27.6 percent January 2023. Sensitive Price Index for July-January 2023 was 28.56 percent – nearly 11 percent higher the 17.7 percent in the comparable period of the year before.

To claim that the fault lies entirely with the Fund conditions is a half-truth for two reasons: (i) the utility rate rise reportedly agreed with the Fund is designed to usher reforms in the poorly performing sector, with a circular debt of over 2.5 trillion rupees today, accumulated due to massive distribution/transmission losses/theft/non-payment of bills by the public and influential private sector, contracts signed with the IPPs under the CPEC initiative (during the previous PML-N tenure) that majorly favoured the IPPs, and passing on the buck to consumers for the past two to three decades without implementing the agreed reforms which accounts for the refusal of the Fund team to agree to a further phasing of the agreed conditions; (ii) petroleum levy not part of the divisible pool has a high inflationary impact. It is projected at 750 billion rupees by the end of the current year (unlikely unless legislation raises the levy from a maximum of 50 rupees per litre to 70 rupees per litre).

The preferred option would have been to undertake reforms in the tax structure and render it more equitable and fair as recommended by the MD of IMF; and (iii) the reported rise in expenditure as per the briefing of the Ministry to the Cabinet on 14 February to 11.225 trillion rupees against the budgeted 9.579 trillion rupees with only 40 billion rupees as higher allocation for Benazir Income Support Programme is extremely concerning.

The claim by the Prime Minister this Wednesday past that he envisages 200 billion rupees in savings from slashing salaries/perks/privileges of federal ministers and senior bureaucrats is a step in the right direction (though many of the measures are a repeat of a cabinet decision last year that prompted the issuance of an Office Memorandum of 7 July 2222 titled Austerity Measures for Financial year 2022-23) yet one would have hoped that the cabinet had also announced the implementation of the 2010 eighteenth amendment that envisaged the devolution of at least 18 subjects to the provinces but which remain un-devolved to this day.

To conclude, the 85 plus-member cabinet must surely be aware that a briefing by the relevant ministry will be biased in favour of its own performance as well as that of its minister and that to get a more accurate picture requires a more proactive role in not only assessing the state of the economy today but also the contribution, if any, to the current impasse by its minister.

Information, given today’s available communication methods, is easily available and all that is required is time and energy to better understand them to ensure that their constituents are protected to the extent possible.

Copyright Business Recorder, 2023


Comments are closed.

KhanRA Feb 27, 2023 08:55am
Expect no key reforms to be pursued by Dar - has no interest in fixing the country’s problems. He bankrupted the country to inflate the value of the rupee, and his gross mismanagement is an indication of his incompetence. And if you needed further evidence, note that he said Allah alone can save Pakistan, and then begged the Pakistani diaspora to buy zero interest bonds to help bail the country out. That doesn’t exactly inspire confidence!
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Matt Feb 27, 2023 12:24pm
Garbage in Garbage out! That is the reality of the Crooks & Corrupt Inc! The corrupt elite and Waderas have so much assets and lands and they never pay any taxes! What a joke! IMF ought to recommend taxing the filthy rich elite!
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Matt Feb 27, 2023 12:34pm
@KhanRA, This dude received huge kickbacks from Chinese companies and is responsible for high-interest loans!
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A. Tahir Feb 27, 2023 01:09pm
Reality Check: Main threat to the country is the compromised leadership!
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Asim Feb 28, 2023 12:47am
@A. Tahir, Mir Sadiqs and Mir Jafers are dime a dozen!
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