Between boom and bust

Published June 24, 2021
The writer is a business and economy journalist.
The writer is a business and economy journalist.

A MASSIVE bet has been placed. The forthcoming fiscal year, that begins in July 2021 and runs till June 2022, could either prove to be the turning point the government is placing all its bets on, or the year in which the hybrid experiment unravels. It is hard to see a middle course at this time, although it’s still possible for this set-up to limp along and scrape out another year for itself.

The turning point will come if the bet pays off. The bet is that outside help is about to arrive in quantities large enough to underwrite a boom in the economy. We got a first glimpse of this when the government proudly announced that a $1.5 billion “oil facility” from Saudi Arabia has been agreed and will begin from July. Pakistan imports anywhere from $6bn to $10bn of petroleum products (including crude) in a year, so the amount of the facility is barely enough to cover two to three months of our requirement, but when spread out over a longer period, it will certainly take some pressure off the import bill and allow the government some room to keep oil prices relatively stable at the pump while at the same time increasing the petroleum development levy, perhaps not by the amount required to meet the target of Rs610bn collection from it this year. But it is entirely possible that the size of the facility will be increased down the road.

These ‘administrative measures’ they’re talking about are the policy equivalent of a red herring.

It is worth noting that the government of Pakistan announced the deal a day after the outcome of the election in Iran was announced, in which hard-liner Ebrahim Raisi won and is set to be sworn in as president in August, the same month in which the Saudi Arabian crown prince is likely visit Pakistan. That visit was originally supposed to take place after Eid, according to word put out by senior government ministers after the prime minister’s visit to the kingdom in May, which was itself preceded by a visit to Tehran by Pakistan’s Foreign Minister Shah Mahmood Qureshi by a few weeks.

A diplomatic game seems to be on and Pakistan has succeeded in breaking the ice with the kingdom for now, and the oil facility appears to be a token of acknowledgement of this. But the real prize will come from the US and for that all eyes are on the IMF at the moment, since that is where the first hint of another icebreaker event will come from.

Today (Thursday) at 6:30pm local time the IMF is holding its first press conference since the budget was announced and the ongoing review talks between the government and the Fund ended without an agreement. The IMF spokesperson will be taking questions from journalists around the world on all issues that the Fund is involved in, but undoubtedly he will say something about why those talks ended inconclusively. This will be our first indication on where exactly things stand. In the past, the IMF has felt free to talk about where problems have arisen during these reviews, especially where they failed in reaching an agreement. We know this time there are problems, which is why the review was left inconclusive, the tranche not released. What we don’t have are specifics, and it is possible we will get some clues to that in the press conference later today.

But if Gerry Rice, the spokesperson of the IMF who will be conducting the presser, sugar-coats his answer or sidesteps the question of what specific problems prevented a staff-level agreement from being reached in these talks, it will be our first clear indication that geopolitical muscle is being applied on the Fund. If that happens we can be reasonably certain that the government is going to get its way, and that includes not just significant modifications to the programme as envisioned in the last staff report, but quite possibly also an augmentation of funds of around $2bn by August or September this year. Nothing less will do.

Read: Debating the budget

The problems will arise if the bet fails. For some reason, if they fail to secure the external support that they need to pull off what they are trying to do — spend their way out of the doldrums — then this may well be the year the experiment begins to unravel. Their own budget is unravelling fast, starting less than 24 hours after its announcement on the floor of parliament, when the finance minister admitted the next day that a particular tax on internet and cellular services was included by accident even though it was not approved by the cabinet. That tax was supposed to bring in around Rs100bn, but when it was withdrawn and reporters asked how they intend to fill the hole left behind in the revenue plan, the only answer they got was “it will be done through administrative measures”.

That, of course, is no answer. These ‘administrative measures’ they’re talking about are the policy equivalent of a red herring. Since then, one after another revenue line is coming under attack and industry players are betting that those will also be withdrawn, given enough pressure. Ultimately the budget, and its aim to pump growth, will be left standing on two legs only: free oil and free dollars from abroad.

All they need is two years — 2023 is when the hybrid experiment has to turn to the people for a new mandate. From the way they are behaving it is clear that losing is not an option for them. And they cannot win on the strength of their own track record — they themselves know that. They will do whatever they have to do to win the next round. That is the game that has just been launched with the budget, and that is the path they are now gearing up to walk. The oil facility was the first milestone. The IMF is the second.

The writer is a business and economy journalist.

Twitter: @khurramhusain

Published in Dawn, June 24th, 2021



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