Economy: Talking the big talk

Published January 1, 2020
Financial wizards Hafeez Shaikh (left) and Shabbar Zaidi have a mountain to climb apparently without proper gear and equipment at their disposal.
Financial wizards Hafeez Shaikh (left) and Shabbar Zaidi have a mountain to climb apparently without proper gear and equipment at their disposal.

IT was a careening year for the economy. At the start of 2019 there was mounting anticipation around the future direction the government was going to adopt as the foreign exchange reserves continued to slide, borrowing from “friendly countries” was in full swing, the IMF negotiations were not moving forward and an announcement of a “mini budget” had been made for later in the month. Confusion prevailed as the market looked for hopeful signs of forceful steps to be taken to control a runaway fiscal deficit that was being plugged with borrowings from the State Bank of Pakistan since banks were also refusing to lend to government despite massive interest rate hikes.

Read: Getting down to business in 2019: Highlights from Pakistan's economic year

In short, the financial markets were stalled as they awaited a decision by the government on how it was going to tackle the twin deficits — fiscal and external. By the time the fiscal year ended, the government had put out among the worst fiscal numbers ever seen in Pakistan’s history, with zero growth in revenue collection and the highest ever fiscal deficit equal to 8.9 per cent of GDP. On the external side, the continuous declines in the foreign exchange reserves continued making it necessary for the country to borrow up to $5 billion from Saudi Arabia and the UAE in short-term deposits.

On the domestic side, the situation was even more dire. When the government entered office, the total stock of domestic debt was around Rs9 trillion, of which around Rs3tr was borrowed from the State Bank of Pakistan, meaning it was money that was printed to help pay government bills. By January and February, the stock of domestic debt touched Rs11tr, with almost Rs7.5tr of it borrowed from the State Bank. In proportional terms, borrowing from the State Bank accounted for around one-third of total domestic debt in July, 2018, and by early 2019, this proportion had crossed two-thirds.

This massive monetisation of the deficit became one of the biggest reasons for high inflation, which began its relentless climb in early 2019, and the external borrowing entangled the country in the geopolitical preferences of its creditors – the Gulf Arabs. Yet at the start of 2019, then finance minister Asad Umar preferred to talk of a “home-grown” package of economic reforms to meet the challenges of the twin deficits, and spoke as if the period of adjustment was already over, pointing out that larger borrowing from the private sector was a sign of returning health and inflation and currency depreciations might soon be reaching a plateau.

From a home-grown programme to chasing an ambitious revenue target, much has been said and heard by all concerned. Will the govt walk the critical walk in 2020?

Then came the massive U turn; a sudden and dramatic turn in April. No sooner had Asad Umar returned from Washington DC after attending the Spring Meetings of the IMF and the World Bank, and was preparing to announce a major breakthrough in the talks, than the Prime Minister himself announced that a new advisor on finance was being appointed. The name was an old one, Dr Abdul Hafeez Shaikh, who had served in various capacities in the Musharraf regime, as well as had been the finance minister in the PPP government from 2010 till 2013.

Shaikh moved fast and decisively. Within days of his coming into office, he signed an agreement with the IMF, and soon the State Bank Governor was also replaced with a deep IMF insider, Dr Reza Baqir. It was not clear what the terms of the agreement signed with the IMF were at that point in time, but as interest rates continued rising to hit 13.25pc by June 2019, currency depreciations continued unabated, and a budget was announced with the most ambitious revenue target of any budget in Pakistan’s history, it became clear that a very tough IMF programme had just been signed.

As the details were released in July, 2019, the country saw for the first time what was to lie in store for the next three years. The revenue target was not only the most ambitious ever seen, but the next year was to continue on this trajectory. Interest rates would be pegged solely to inflation, with no regard to the impact on economic growth, and exchange rates were to be “market determined” from here onwards.

After the budget the government launched its “documentation drive”, trying to get the services sector to register its incomes, particularly traders. A new face had been brought in specifically for this purpose. Shabbar Zaidi, a private-sector chartered accountant from Karachi, was famous for highlighting tax evasion by the services sector and partially in response to his high-profile public arguments to this effect, he was tapped by the government to come and do what nobody else had been able to manage thus far.

Zaidi’s proposal centred around an old idea: make it mandatory for all parties to collect personal identities of their vendors when making or receiving any payment. This had been tried before, in the early 2000s as well as for a brief moment by the PPP government in 2009, but had always spurred spirited opposition. This time it was not only going to be done on a massive scale, but it had been made an integral part of the revenue effort to be launched in pursuit of the most ambitious revenue target any government had ever seen.

As the implementation of the budget began, strikes were announced by trader communities around the country, and the government quickly buckled. It postponed the implementation of the condition to keep identity records of all sales and purchases, then once again in October, as the deadline expired, a second round of strikes forced the government to postpone the implementation one more time. Now they are saying implementation of the condition begins from January 1, but the traders are still in no mood to comply.

From a home-grown programme to mounting debt to chasing an ambitious revenue target and keeping the exchange rate and interest rates pegged on market dynamics, the government has talked the big talk throughout 2019. But in its actions, it has turned away from the difficult consequences of its actions every chance it had. The year 2020 will be the test of the government’s decisiveness.

Published in Dawn 2019 Year Ender


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