Diverging paths

Published April 15, 2021
The writer is a business and economy journalist.
The writer is a business and economy journalist.

LAST week, I wrote that there appears to be a tussle within the government at the highest levels over the future direction that the country’s economic policy will take. The prime minister is sounding fed up with the austerity imposed under the IMF programme, and under pressure from his own party’s lawmakers, is looking to loosen the constraints of the programme and spend a little more than he has been allowed to thus far. However, another player, whose identity is not known but who seems to also be calling the shots within the government, seems to want to stick to the commitments given to the IMF.

I said how things work out as this tussle wears on will become clearer when three questions are answered. First, who will be the next finance minister of Pakistan? The persistent rumour that Hammad Azhar is about to be replaced by Shaukat Tarin has only been reinforced since last week. He was waiting for NAB’s appeal against his acquittal in the rental power case to be decided, but the Islamabad High Court threw a spanner in that expectation by refusing to hear the case on an expedited timeline as NAB requested in its plea. But on Tuesday, he paid a visit to the FBR, and according to reports in the press, stayed there for a few hours getting a detailed briefing from the high-ups in the tax authority. Whether or not he’ll be coming in remains an open question, but it is looking increasingly likely according to continuous press commentary.

Second, we needed to see the IMF staff report for the programme that was negotiated and agreed to by Hafeez Sheikh only days before his unceremonious departure. That report has now been uploaded — and not only that, the budget strategy paper of the government has also been unveiled. The staff report shows us what commitments the government made to the Fund. The strategy paper shows us what it is moving to do in the forthcoming budget. And there are important discrepancies between the two. Those tell an important story.

Third, we needed to see what the intentions of the new finance minister — whoever actually replaces Hafeez Sheikh — really are. Hammad seems to have made some of that known following a chat with the IMF’s managing director on Monday, following which she tweeted that “the way forward for vital economic reforms” was discussed as well as “external financing needed” by the country to meet its challenges in the months ahead. It seems like they are not only asking for relaxation of the targets, but additional support as well.

The strategy paper shows a significant deviation from the commitments given to the IMF by Hafeez Sheikh.

Some clues on what sort of relaxation they are looking for are provided by comparing the targets in the budget strategy paper with those committed to the IMF a few weeks ago. Let’s start at the top and compare these numbers. The Fund projects the growth rate of the economy to be four per cent next year while the strategy paper projects 4.2pc, so already a discrepancy will open up in all other figures as the headline number has been nudged up a little. Keep in mind with total GDP projected to be around Rs52 trillion, a 0.2pc difference means well over Rs100bn.

After this the Fund sees the fiscal deficit at 5.5pc next year while the government is saying 6pc in the strategy paper, meaning a discrepancy of more than Rs260bn. Meeting even this 6pc target will require that the provinces more than double their surpluses next year, where they have struggled to meet even the budgeted surpluses in the past. It’s a safe bet that even this elevated 6pc target will prove challenging. The Fund projects the primary balance to be in surplus by Rs143 next year, while the strategy paper projects it to be in deficit by Rs49bn instead, meaning a Rs192bn discrepancy.

Moving on, the government is aiming to collect total revenues of around Rs8 trillion next year as per the strategy paper, but to the Fund they have committed Rs8.8tr, a discrepancy of Rs800bn. They are planning to spend Rs800bn as part of the federal development budget, while to the Fund they have committed that this amount will be Rs627bn, a discrepancy of Rs173bn.

So already some elements of the ‘new direction’ seem to be coming into view: higher spending and fewer taxes. As a result, the deficits will be elevated, borrowing costs will be higher by Rs45bn, and public debt will be one percentage point of GDP higher than what has been committed to the Fund.

In part, this elevated spending and reduced tax burden will be financed through borrowing. But another important discrepancy could be pregnant with lots of meaning regarding the tussle over the finance ministership. The Fund was told by Hafeez Sheikh that defence spending next year will be Rs1.444tr, higher by 12.5pc from the current year’s projected total. But in the strategy paper, defence spending is given as Rs1.33tr, lower by Rs114bn from the committed, and representing a meagre 3.6pc increase from this year.

The strategy paper shows a significant deviation from the commitments given to the IMF by Hafeez Sheikh, with the government aiming to free up more space for itself through a relaxation of its budget deficit and debt reduction targets, as well as by reallocating expenditures away from defence towards development.

It seems that Imran Khan is feeling the pain of the adjustment that he has had to undertake — with a short hiatus between last April till now — and is keen to spend money to shore up the sagging and beleaguered electoral prospects of his party lawmakers. He is under growing pressure from within his party to do more to alleviate people’s suffering under high unemployment, high inflation and stagnant (or declining) wages. But resources are limited, and the constraints on his ability to spend are strong. This is what lies behind the tussle over the finance minister slot. The numbers provide a clue as to who is tussling over what.

The writer is a business and economy journalist.

khurram.husain@gmail.com

Published in Dawn, April 15th, 2021

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