Prime Minister Imran Khan has replaced Asad Umar as the finance minister for one would assume poor performance. The question is how and when did he perform poorly?
The state of the economy remains a source of serious concern eight months after the Pakistan Tehreek-e-Insaaf (PTI) took over the reins of government. The Khan administration made periodic attempts to ease fears with the Prime Minister consistently stating that the pain currently being felt by the people (due to erosion of the rupee and consequently of quality of life) is being dealt with through appropriate measures; former Finance Minister Umar referred to the economy coming out of the ICU and into the general ward, but there were few takers for this claim as with each passing month the value of the rupee earned continuously eroded coupled with dire forecasts by multilaterals - forecasts premised on the existing policies continuing till the end of the current fiscal year. The International Monetary Fund (IMF) went so far as to claim that the projected budget deficit for the ongoing year was a whopping 2.5 percentage points 'looser' than was budgeted.
The State Bank of Pakistan's (SBP) second quarterly report supported the projections by multilaterals however the Bank, did a grave injustice to the Khan administration which Umar neither noted nor raised as a serious issue: the SBP report compared the current disturbing key macroeconomic data with targets set in April 2018 budget that was presented by the Shahid Khaqan Abbasi-led government. These targets were grossly unrealistic and given the general elections scheduled for end July tax measures and expenditure priorities consisted of even more of a wish-list than in the previous five years. True that Asad Umar could have and should have but did not revise the targets when he presented the two amendments to the finance bill 2019 so a portion of the blame rests with him.
The second failing of the Umar-led finance ministry was persistent failure to take measures to contain the budget deficit. To blame the previous government for all economic ills including the budget deficit which consists of expenditure and revenue for only one year is simply not credible. True that the budgeted outlay on interest payment on domestic and foreign debt can be attributed to previous administrations (and Ishaq Dar did raise indebtedness, particularly external debt, to unprecedented levels) yet this accounted for around 35.5 percent of total current expenditure in 2017-18 and was projected by PML-N to account for 34 percent of current expenditure in the ongoing year. Umar however is to blame for failing to contain expenditure allocated to the other two major recipients - running of civil government and defense. Relations between the civil and military leadership since the Khan administration assumed power have been exemplary - relations that reports indicate would be further cemented with the appointment of Dr Hafeez Sheikh as the finance minister; one would hope the new man would seek voluntary curtailment of these two major expenditure items for a period of a year or two to ensure that all Pakistanis make a sacrifice to bring the economy on the right path.
Private sector as an engine of growth is a mantra that the Khan administration in general and the Special Advisor to the Prime Minister Razzak Dawood in particular firmly believe in - a mantra that is based on a school of economic thought that argues that the government should not be in the business of business as, unlike the private sector, it lacks the motivation to run cost efficient units. The question is whether this mantra can be applied to the Pakistan economy as much as to other more developed economies. In this context it is relevant to note that the second supplementary finance bill 2019 envisaged fiscal and monetary incentives to the private sector which led to lower revenue collections - Asad Umar projected an outlay of only 10 billion rupees while independent economists evaluated the package at over 140 billion rupees, and this has yet to fuel growth in productivity.
The State Bank of Pakistan's (SBP) second quarterly report for the ongoing fiscal year makes a very pertinent observation though it does not belabour the point: "given that public development spending, a key driver for private sector industrial activities, is unlikely to pick up anytime soon, the full year outlook for manufacturing activities remains subdued." In other words, the SBP notes a linkage between public sector development outlay and private investment.
In all fairness to the PML-N government its focus on developing infrastructure raised employment opportunities and fuelled growth. Prime Minister Khan is focused on social sector development, and there is no doubt that the country needs to focus on providing clean drinking water to the un-served, raising availability of health care, raising education levels that would in the long term generate more value added productivity however in the short term these expenditures would slow down growth and reduce not increase employment opportunities. And hence given the state of economy where the productive sectors are experiencing historically low growth rates it may be appropriate for the country to defer some of the outlay on social sectors in favour of physical infrastructure development.
Hafeez Sheikh has his work cut out for him. During his previous stint in government his record was not exemplary (Ishaq Dar was compelled to go on an IMF programme as soon as he was given the finance portfolio) for two reasons: (i) he failed to convince his political appointees (due to their political considerations outweighing economic considerations) to meet the IMF programme conditions with respect to tax and power sector reforms accounting for two tranches remaining un-disbursed. These considerations remain even more applicable today as does the need to reform the tax and power sectors relative to the tenure of the PPP government as the Khan administration is committed to heavy social sector spending for example on the Ehsaas programme; (ii) instructions to raise allocations were typically dealt with by Sheikh through setting up a committee in an attempt to delay and stave off a rising budget deficit however this may not work now as Prime Minister Khan reportedly remains proactively engaged in all economic related decisions; and (iii) there was no out of the box thinking with respect to revenue generation or institutional reforms and Sheikh manipulated inflation data through reducing the weightage of food by 6 percent. The Prime Minister should be wary of Sheikh changing the definition and/or the weightage of any key macroeconomic indicator.
Perhaps it is due to these reasons that a parallel committee has been established to oversee or advise the finance ministry led by the two Tarins - Jehangir and Shaukat - who are close to the Prime Minister.
To conclude, Sheikh may be old wine in a new bottle. Perhaps the Prime Minister should revisit his offer to three extremely well regarded Pakistan born economists serving in prestigious institutions abroad.
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