Anjum Ibrahim
Pakistan has taken 14 International Monetary Fund (IMF) bailout packages since 1980 - some were completed (including the Extended Fund Facility 2013-16 though it left the country worse off than before) and others not as political considerations were allowed to prevail and the programme abandoned before completion. Significantly Pakistan’s four successive administrations, (including the incumbent government that has already requested a package), sought IMF loans in the first six months of their administration indicative of the poor state of affairs they inherited.
The IMF approved a loan of 596 million dollars to Pakistan in 2000 with total external debt of 36 billion dollars. The letter of intent (LoI) signed by Dr Ishrat Husain as Governor State Bank of Pakistan (SBP), disturbingly advising the prime minister on civil service reforms at present, and Shaukat Aziz as Musharraf’s selected Finance Minister with no macroeconomic experience acknowledged that gross official reserves had declined from 1.7 billion dollars (7.4 weeks of imports) to 0.9 billion dollars (3.7 weeks of imports) and the budget deficit had, “widened to 6.5 percent of GDP in 1999/2000, from 6.1 percent of GDP in 1998/99, adversely affected by the delayed adjustments in domestic petroleum prices, an increase in the government’s interest bill, an overrun in defense expenditures, the settlement of accumulated tax refunds, and additional provincial transfers to municipalities in lieu of abolished local taxes.” This diagnosis was repeated almost verbatim by the two subsequent administrations – in 2008 and 2013 and is likely to be repeated in the current year as and when the Khan administration submits the LoI.
And not surprisingly the commitments (reflective of the IMF conditionalities) made by Husain/Aziz resonate with what was supported by the subsequent two administrations notably Zardari-led government and the PML-N government, and needless to add are likely to be part of the 2018 LoI: “a comprehensive structural reform plan through a broad consultative process involving participation of business leaders, professionals, academics, non-government organizations, as well as government officials from the federal, provincial, and district levels” has been developed with the objective of “rebuilding confidence of domestic and foreign investors, alleviating poverty, and promoting good governance.” And the claim by the Musharraf administration was that “corporate management structures have been put in place in the petroleum, gas, and power sector enterprises.” And yet these three critical sectors continue to suffer from appallingly poor governance to this day.
The 2000 LoI also claimed that “on the fiscal side, the GST was extended to petroleum, gas, and electricity, and all tax whitener schemes were withdrawn. However, tax amnesty schemes have remained in place to allow those who had previously evaded taxes to settle their tax liability with a one-off payment. A major tax survey and registration campaign was launched to widen the tax base and facilitate vigorous enforcement of the GST in the retail sector from next year.” Eighteen years later Pakistan continues to rely on taxes on petroleum products, gas and electricity due to ease of collection rather than reflective of an attempt to formulate a fair and non-anomalous tax system. However with the rise in the current account deficit sourced to widening of the trade deficit the PML-N administration extended a 3 rupee subsidy to the five zero-rated export sectors whose implications on the budget deficit have been greater than on reducing the trade deficit, a policy that continues to this day. The non-zero rated industries did not receive any subsidies and hence were subjected to a rise in their costs of production whose impact on the general price level cannot be disputed.
Additionally, there have been several tax amnesty schemes, all claiming to be one-offs, including tax investment scheme 2008, an amnesty offered to stock exchange investors in April 2012 and concessions to tax evaders in May and June 2012. The objective of these schemes: to generate revenue for a particular year with no attempt to reform the tax structure. During the Dar years there were two amnesty schemes while during the Abbasi-led government one tax amnesty scheme was announced. The objective: to raise money to reduce the deficit.
There is one major difference between the LoIs prepared by the civilian governments and Musharraf’s dictatorship. In 2000 the focus was: “on the expenditure side, current spending will fall on account of lower interest expenditure, reduced outlays on subsidies, and lower defense spending in relation to GDP,” though it was later acknowledged that the economies were not achieved mainly because after 9/11/2001 Pakistan received considerable aid, though mostly in loans. Zardari and Nawaz Sharif administrations did not consider reducing current expenditure and instead reduced development expenditure, with a negative impact on growth. Sadly, Asad Umar’s supplementary budget indicates the continuation of the flawed policy of his two predecessors - reduce development expenditure to meet the budget deficit target rather than current expenditure.
Are economic policies an outcome of bureaucratic recommendations or are they the outcome of decisions by the Cabinet? A school of thought maintains that the bulk of the budget expenditure is a given as it includes: (i) past obligations notably external debt servicing (and payment of principle as and when due), (ii) demand by the defence forces which a civilian dispensation rarely if ever challenges, (iii) civilian/military administration - salaries and pensions, and (iv) subsidies used to insulate the poor from a price rise while the more cynical argue that subsidies are to sustain the government’s voting base. While previous administrations have not challenged these components of current expenditure yet it is time for the Khan administration to seek to negotiate with the civil service to keep incomes constant (a policy followed by the Labour government in the UK during periods of severe economic crisis) and suggest to the defence forces to voluntarily reduce their demand for the current year. Additionally, Imran Khan is on record as stating that his instructions are being resisted by a bureaucracy that remains loyal to the Sharifs. And yet he has not changed those holding key positions in the economic arena.
A finance minister has a major role to play in policy making especially in times of economic crisis and if he cedes that control to bureaucrats then that too is his responsibility. Musharraf’s tenure can be divided into three economic periods: (i) his coup d’etat isolated Pakistan for over a year; (ii) after 9/11 the world reengaged with Pakistan and a lot of loans on easy terms were extended that led to a period of economic growth and prosperity; and (iii) Shaukat Aziz failed to focus on improving infrastructure, social and physical, and instead transformed Pakistan into a consumer society that, once aid dwindled and the price of oil rose, led to the economy requiring a bailout package from the IMF.
Pakistan People’s Party has appointed technocrats, not party members, as finance ministers and during its 2008-13 tenure the party appointed Shaukat Tarin who perhaps was the only finance minister this country has ever had who exhibited a backbone when he insisted on third party audit of the highly controversial rental power projects in spite of resistance by several cabinet members. Tarin resigned and was replaced by Dr Hafeez Sheikh, an economist, who nonetheless exhibited lack of backbone in defending policies based on economic considerations and at best deferred decisions supported by his less influential cabinet colleagues by setting up a committee to delay the process indefinitely. He is accused of manipulating data but unlike Shaukat Aziz he did not change the end figure, inflation, and instead changed the weightage of its components. In other words he lowered the weightage of food by 6 percent thereby showing a marked reduction in inflation.
Dar jealously guarded his position as Prime Minister Nawaz Sharif’s sole confidante and with that objective he vigorously opposed all advice from qualified economists, whether pro-PML-N or independent, and proceeded to continue his flawed policies that account for Pakistan’s heaviest ever indebtedness with a historically high current account and budget deficits. To keep up the façade of good performance Dar redefined debt and circular debt, extended tax benefits to particular groups for example the stock market players to ensure their support whenever he was criticized, and manipulated data in which he was easily caught out by independent economists.
Asad Umar, a well intentioned man who has no history of being in government and therefore like the Prime Minister, no allegation of corruption, has held various key posts including running a large company like Engro as well as heading the Pakistan Business Council. That he is no economist is reflected by several statements, not least his most recent statement on the floor of the house when he explained how supply and demand sets the price of any commodity. He however failed to take account of two facts: (i) perfect competition where supply and demand set the price is only one type of market, there are many others; and (ii) in Pakistan perfect competition is rare given the range of cartels, there is even a sugar cartel, and the tendency of the sellers to resort to profiteering on religious holidays.
Umar also insists that the cash to deposit ratio must be reduced, a statement that defies economic logic. He should be made aware by perhaps the Governor SBP that the existing liquidity available with the banks is not being used to finance domestic investment as the SBP website reveals that as of 20 September 2018 excess cash reserves held by banks over and above the Cash Reserve Ratio were 48,926 million rupees. Additionally, the decision by Dar to tax cheques over 50,000 rupees has fuelled a cash economy, a tax that was raised by Umar in his supplementary budget for non-filers from 0.4 to 0.6 percent.
Umar’s support for two Dar era policies is inexplicable in economic terms including supporting withholding taxes that are largely in the sales tax mode and hence are either indirect whose incidence on the poor is greater than on the rich (though the Federal Board of Revenue erroneously claims that 80 percent of all direct taxes collected are withholding taxes) or imply payment of additional taxes by the filers – one cut at source and again if the filer purchases any item that has a withholding tax levied on it.
To conclude, Umar needs qualified economists to assist him and his decisions must be carefully discussed by cabinet members.
