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Dar’s difficulties

October 23, 2017

REGULAR appearances before an accountability court and related matters have been consuming a significant portion of Finance Minister Ishaq Dar’s busy schedule in recent weeks.

Pressure keeps mounting on him from all sides — political opponents, jealous colleagues and powerful groups and institutions — to give up his position and in some cases to share the pie.

He has lost a lot of weight, influence and confidence that he used to wield until only a couple of months back.

But Mr Dar has stood his ground. He ensured the World Bank “rectified” the game of numbers that triggered a fresh storm around the fading foreign exchange reserves which had renewed calls for his resignation.

And even though Mr Dar could not personally make it to the annual IMF-World Bank gathering — owing to his ongoing legal difficulties — engagement with the lending agency by his close aides delivered the desired results.

In a rare show, the World Bank “clarified” that external financing needs of nine per cent of GDP, or $31 billion, was extrapolation on data and agreed that foreign portfolio investments were not part of Pakistan’s external financing needs.

Though it is easier said than done, in an environment of heightened political and institutional temperature the country needs to calm the critical commentary

Yet, it still insisted the country was facing headwinds in the external sector and the rising fiscal deficit could put macroeconomic management at risk.

“This has resulted in increased external financing needs of 5-6pc of GDP in financial year 2018, or around $17bn, to cover rising current account deficit and debt repayments,” the bank said. These projections are even lower than Pakistan’s $18bn estimates for the current year’s foreign exchange needs.

Meanwhile, the finance ministry was, behind the scene, in negotiation with local and international banks for short-term inflows to sustain national forex reserves of about $14bn — a threshold for three months of import cover — to remain an uninterrupted recipient of the World Bank loan.

During this breathing space, Pakistan has to fill the gap for a longer sustainability through a combination of relatively cheaper sukuk (Islamic bonds) backed by assets collateral and traditional international commercial bond, totalling around $2bn with five- to 10-year maturity.

The process is almost ready: banks selected, markets identified and targets firmed up, but the decision on the precise timing is as yet undecided.

Though it is easier said than done, in an environment of heightened political and institutional temperature — to which Mr Dar and his political leadership had a fair share of contribution — the country still needs to calm the critical commentary that is creating a perception of crisis on the economic, security and political fronts.

This is important because mark-up costs from international capital markets are directly linked to the vulnerability and eagerness factor of the fund-raising client.

More importantly, doing so would be a test of PML-N’s political maturity and negotiation skills to manage expectations of additional domestic resource flows to voters in an election year, and the security needs that have been constrained by disruption of about Rs125bn on account of Coalition Support Fund from the United States this year.

Mr Dar has sent the message across that the security cost has increased from 17pc of federal budget four years ago to 21pc even though many allocations remain wrapped in other grants and Public Sector Development Programme (PSDP).

In this push and pull for a greater share in a limited pie, the powerful have always been able to secure the most, but a fine balance would depend on many variables.

Under a tighter control on the purse this year, the Ministry of Finance has thrown the lowest first quarter fiscal deficit in 10 years — 0.9pc of GDP — despite a higher-than-usual development expenditure and lower non-tax revenue yield.

This is a significant sign as the country showed the highest full-year fiscal deficit in five years just last year and private economists forecasted a deficit of 1.5pc of GDP in the first quarter this year.

On its part, the government has already passed on the additional security cost of the China-Pakistan Economic Corridor to the public at large by making its financing a part of the consumer tariff in case of all the power projects on the one hand, and the cost of other development PSDP projects on the other.

On top of that, Mr Dar has been advocating setting aside at least 3pc of net divisible pool resources for additional security expenditure.

Prime Minister Shahid Khaqan Abbasi has taken steps to pacify the environment. He has supervised healthy briefings to key stakeholders for a “better understanding” and sent outreach teams of revenue machinery to explain why filing income tax returns by every individual is a key to expanding the tax base.

At the same time, he has directed the finance minister to create space out of the divisible pool under the National Finance Commission (NFC) to proportionately bear the burden of additional security costs — a proposal Mr Dar has been advancing for almost two years now without any result, except delaying the fresh NFC arrangement.

Stakeholders need to rise above the impression of pointing figures and jointly put the house in order, both in economic and security deliverables, instead of scratching wounds that would help none.

Published in Dawn, The Business and Finance Weekly, October 23rd, 2017