Challenges for Shehbaz Sharif – Opinion

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It is indeed extremely disconcerting that the challenges facing the government of Shehbaz Sharif today differ only in intensity rather than substance from those faced by the PPP-led government in 2008, the government of his brother in 2013 and the government of Imran Khan in 2018 – an intensity accumulated due to the persistent failure to implement the reforms that the three previous administrations had agreed with the International Monetary Fund (IMF) – in the programs from 2008, 2013 and May 2019.

Imran Khan has repeatedly said that one of his regrets was the delay in participating in an IMF program. The question is how many months has it lagged behind its predecessors? The prime minister of the Zardari-led government was sworn in on March 24, 2008, and the IMF stand-by arrangement was approved on November 24, 2008, an eight-month delay. The total amount of the loan was 7,235,900 (one thousand) Special Drawing Rights with only 4,936,035 (one thousand) SDRs withdrawn due to the suspension of the program due to the government’s inability to implement sector reforms electricity and taxation. The reason for the failure: political considerations.

Nawaz Sharif was sworn in as Prime Minister on June 5, 2013, and the country entered an IMF program on September 4, 2013 or after three months. Needless to add that the talks with the Fund were already underway at the beginning of the year but were finalized by the new government, which may explain the speed of the agreement with the Fund. The program was completed as planned, with the loan amount agreed and withdrawn amounting to 4,393,000 thousand SDRs. However, most of the reforms, especially regarding the containment of the budget deficit, were abandoned in the run-up to the 2018 elections.

Imran Khan was sworn in on August 18, 2018 and the loan deal started on July 3, 2019, although the staff level deal was reached on May 12, 2019 with extremely strict preconditions. So from the day he was sworn in as Prime Minister to the time the staff level deal was done, it took just under eight months, about the same time he took took the PPP-led coalition government to finalize a program loan. Would the state of the economy when he left government have been different if the government had launched a Fund program sooner? Absolutely not as it had proactively pledged during this period to secure over $8-9 billion from three friendly countries, especially since the renewal of all pledges for the duration of the program was a condition. prior to the Fund. However, the responsibility for the current economic stalemate cannot be entirely attributed to the pandemic and the Russian-Ukrainian war or to previous governments.

The three previous Pakistani administrations committed to essentially the same policies as their predecessors – the difference was in the adjustments allowed by the Fund given that all three were on one programme. In the electricity sector, the PPP years were marked by poor performance with serious contractual defaults that favored suppliers, including contracts with power rental projects. During PML-N’s tenure, China-Pakistan Economic Corridor production contracts were on the same terms and conditions as contracts dating back to the 1990s and early 2000s which also favored suppliers. However, over the past three and a half years, circular debt has risen from 1.2 trillion rupees to 2.4 trillion rupees, reflecting continued poor performance.

Public entities (PEs) have required increasingly large budget injections over the past three terms, although the three governments have made commitments to the Fund to restructure and/or privatize loss-making units.

A tax base that has remained heavily dependent on indirect taxes whose impact on the poor is greater than on the rich with little progress in broadening the tax base as promised by the three previous governments to the Fund.

A persistent challenge that explains why Pakistan is a permanent borrower from the IMF concerns a recurrent current account deficit attributed to pro-growth policies that stimulate imports of raw materials and semi-finished goods which, in turn, fuel productivity; the cost however is a growing trade deficit (with traditional exports susceptible to a global recession/supply) which all but swallows up the increase in remittances to reach an unsustainable current account deficit. But the silver lining is a higher revenue collection. Data suggests that in July-February 2022, revenue reached 3,799 billion rupees compared to 2,916 billion rupees in the comparable period of the previous year (an impressive increase of 30%), of which 52.2 % are attributable to imports. So if imports are reduced (expected after recent restrictive monetary policy interventions, including a high discount rate and an eroding rupee), tax revenue would decline. A hopeless situation.

Is this really a vicious circle that Pakistan simply cannot break out of? Not so. An October 2021 World Bank study titled Pakistan Development Update: Reviving Exports focused on some valuable export promotion recommendations, including: (i) gradually reducing effective rates of protection through a tariff rationalization strategy at long term to encourage exports; the industrial incentive of March 1, 2022 announced by the former Prime Minister does the exact opposite, notably gave more incentives to industries/exporters as well as an amnesty to investors, except for a few sub-sectors; (ii) reallocate export financing from working capital to capacity expansion through a long-term finance facility; (iii) consolidating market information services by supporting new exporters and evaluating the impact of current interventions to increase their effectiveness – and here it should be noted that administration after administration has embraced the incentives normal fiscal and monetary policies without carrying out an empirical study on their effectiveness, which is perhaps partly due to the same faces who run the ministries from one administration to another. This approach has led to the survival of the most influential in industrial/export sectors: and (iv) designing and implementing a long-term strategy to improve business productivity that promotes competition, innovation and maximizes export potential.

In addition, to break out of this cycle, the need to borrow for budget support (as opposed to debt repayment, debt equity and swap deals already incurred) would need to be significantly reduced – external and national. This requires cutting expenses. The easiest and quickest spending to cut is grants, but right now that will have serious and possibly immediate negative political fallout for the 10+ party coalition government. Shehbaz Sharif has therefore shrewdly maintained the oil and commodity subsidy announced by his predecessor exactly seven weeks ago, at least for the next fortnight, but instead allowed fuel adjustment charges on electricity tariffs (which were frozen by Imran Khan under his relief to pack). However, according to Bloomberg, the success of the seventh review which would make it possible to obtain funds not only from the Fund (3 billion dollars remaining within the framework of the current program) but also from other multilaterals and bilaterals “may depend on the capacity of the new government to increase energy prices, removal of subsidies introduced by Khan, a step that would signal “good management”, according to SBP Governor Reza Baqir.

Although it is too early to speak of how much to cut the Public Sector Development Program (PSDP) – it has already been cut from Rs 200 billion to Rs 600 billion – one would assume that further disbursements would be delayed until after the budget. Either way, the tight monetary policy stance in place today will dampen growth as would a reduction in the PSDP, and therefore the projected tax revenue targets will not be met.

And finally, the IMF program must be renegotiated for economic and political reasons that are all the more acute for the coalition government. Is it possible? Kenneth Akintewe, head of Asian sovereign debt at ABRDN in Singapore, says in the Bloomberg report that “the market will see if the IMF relaxes some of its demand given that some of the external risks are more acute than before.” And this must be the main argument put forward by the government authorities.

In conclusion, the task ahead is to reconsider the Fund’s program because the promised multilateral and bilateral aid is based on its continuation. Citing the growth rate as the only relevant macroeconomic indicator does not give a true picture (one must take into account the base which has been weak in Pakistan and in the world due to the pandemic and the Russian-Ukrainian war) and other related indicators including debt to GDP ratio, revenue to GDP ratio, budget deficit and inflation require special attention.

Copyright Business Recorder, 2022

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