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Crucial role ahead for caretaker FM

Updated May 14, 2018

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THE current democratically elected government — the second in the country’s 70 year history — will complete its five-year term on May 31 and hand-over control to an interim administration for two months to ensure a smooth economic and political transition to the next elected setup.

A few names for the caretaker leadership that have so far emerged in public discourse — a retired judge, an economist and a businessman — seem to be coming from irrelevant places even if these might have been floated by the ‘right quarters’.

A constitutional disposition requires Prime Minister Shahid Khaqan Abbasi and Leader of the Opposition in the National Assembly Syed Khurshid Shah to reach a consensus on the name of the caretaker Prime Minister.

The two have indicated a consensus but have opted to keep the selection close to their chest to avoid a media trial.

But more importantly, soon after being sworn in, the interim prime minister has to nominate his interim cabinet. The prospective nominees have to be security cleared. The selection of the cabinet sets the mood of the coming elections besides running the day-to-day affairs of the state.

Apart from the political future, the two-month period will be pivotal in determining how the country’s economy sustains the transition

Apart from the political future, the two month period will be crucial in determining how the country’s economy sustains the transition into the next five years.

While the majority of the economic indicators seem well placed to withstand the changeover, the external account appears to be the most critical area with the current account deficit estimated at a gargantuan $15-16 billion at the end of the current fiscal — almost 5 per cent of GDP.

This will obviously lead to further accumulation of foreign debt, given the present uncertainty around the ultimate behaviour of the remittances, exports, foreign investments and imports.

Therefore, while the selection of the caretaker prime minister will suggest the fairness and transparency of the independent electoral process, the induction of a caretaker finance minister will determine the economic risk management for the nation.

A successful finance minister will be expected to keep uncertainties and economic bleeding — fiscal deficit and current account deficit — as minimal as possible.

An ambitious economic manager adverse to the current political set-up could be tempted to hype-up deficit numbers and macroeconomic fragilities. After all, there are always grey areas in our accounting and financial management system that can show different pictures.

A different treatment of power sector circular debt and provincial cash flows, for example, can move the fiscal deficit for the current year a few percentage points north or south.

Many of us may still remember the volunteering of hidden data to the International Monetary Fund (IMF) around a decade and half ago to imply that the ousted government of the time was involved in ‘data fudging’ and was not honest with the international lenders. This can be easily described as transparency or subversion depending on whom you talk to.

Likewise, different angles can emerge while dissecting the foreign exchange data or debt profile and how it is presented by a sitting finance minister even if he is a caretaker. An interesting addition to this data could be the honest representation of China-Pakistan Economic Corridor flows — both loans and imports — and of course the quality of economic growth.

While foreign exchange reserves will not be a major headache over the next two months of the caretaker government — currently enough for more than two months of imports — there could soon be a challenge, say by September, for the next political government; depending on tactical handling by the caretaker finance minister with the assistance of key stakeholders to follow up with planned inflows from friendly countries.

This is an area where the PML-Nawaz government appears no better than the PPP government five years ago in terms of reserves not enough to cover more than two months of the import bill.

And this is very important given the deteriorating relationship with the Trump administration that remains volatile owing to the CPEC and security issues. The recent Financial Action Task Force episode in Paris and its final outcome due in June could be one indicator.

This will also be critical, if Pakistan has to go to the IMF once again. The Fund, which cannot refuse a bailout because of its mandate, can create economic difficulties by suggesting tough growth affecting conditionalities the country cannot afford so soon after a stabilisation decade.

On top of that, massive borrowing from the State Bank of Pakistan and commercial banks could be a key challenge to manage by the caretaker government. The government has already planned more than Rs5 trillion bank borrowing between now and the third week of July — precisely the transition period — through Pakistan Investment Bonds and Treasury Bills.

The recent results of the bids were short of government expectations, primarily due to low interest rate scenario. The caretaker government may be required at the outset to give an upward revision to the policy rate to encourage banks for active participation.

Published in Dawn, The Business and Finance Weekly, May 14th, 2018