Optimal equilibrium in the PM’s cabinet?

August 28,2018

If the PTI is to succeed in governing, where the PML-N failed, it will need to treat the macroeconomic, national security and foreign policy challenges that Pakistan faces with much more seriousness than what was exposed in the cabinet agendas shared with the media last week.

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If Prime Minister Imran Khan is going to fulfil the promises he has made, one of the challenges he will face will be to find the optimal equilibrium between too little coordination across the key functions of government he now controls, and too much.

What do we mean by “optimal equilibrium of coordination across key functions of government”? Let’s take the example of the Ministry of Finance headed by Asad Umar, and the Ministry of Foreign Affairs, headed by the experienced Shah Mehmood Qureshi.

The primary challenge faced by the newly-elected government is to prevent a fiscal crisis that undermines its ability to allocate resources in a manner consistent with the PTI manifesto’s lofty ambitions and the very high expectations of its voters. In short, the cabinet needs to ensure that Imran Khan has enough money to pay for the reforms and social services that he speaks so passionately about. And this needs to be ensured in an environment where the outgoing caretaker finance minister has published an array of policy papers that include one that recommends slashing provincial allocations within the divisible pool by Rs212 billion. Let’s ignore (for the moment) the problems of legality that any manipulation of the 2010 National Finance Commission (NFC) would represent, one thing is uncontested: there isn’t enough money to pay for the things Pakistanis need.

From the moment that they took oath of office, the policy sins of the absconding Ishaq Dar and the already incarcerated Nawaz Sharif have become the responsibility of Asad Umar and Shah Mehmood Qureshi.

The previous government bequeathed the country a double-headed macroeconomic monster: the first is a crisis of too few exports. Pakistan has a substantial current account deficit (Pakistan’s imports are much higher than its exports). How much higher? The country imported $2.2 billion worth of goods and services more than it exported in July alone. Moody’s estimates that the total current account deficit for this fiscal year will remain under 4.8 percent of the GDP, or in the neighbourhood of the same $15 billion to $18 billion that it was in the 2017-2018 fiscal year. But the July export-import numbers (even after the substantial currency devaluation this calendar year) suggest that the total current account deficit might be closer to $25 billion.

The second (and closely related) is a crisis of too few dollars in the bank. The country’s profile of debt liabilities raises questions about the health of its foreign exchange reserves. This is not an issue of prestige, but simply of the capacity to pay back the loans that Pakistan has taken over the last few years to pay for the nice things the country needs (and Pakistan’s people deserve – more on this below). The total debt repayment due this fiscal year is roughly $9 billion, whereas Pakistan has foreign exchange reserves of roughly $10 billion. In macroeconomic terms, this represents a dramatically close shave.

These two crises represent clear and present dangers to the country across several dimensions. Let’s quickly assess these dimensions.

First, let us not forget what the objective of this exercise is: to have enough money to pay for things. PM Khan has promised that he will create ten million jobs, expand schooling to all Pakistani children, including the 22 million kids that are out of school, reduce maternal and infant mortality, address stunting, and create the momentum that helps Pakistan tackle climate change. He will also have to ensure that our soldiers and spies have the resources they need to continue to protect this country from the terrorists and enemies that are tirelessly working to kill innocent Pakistanis. To do all this, the government needs money. The outgoing caretaker finance minister – as competent as they come – says it needs at least Rs212 billion; other experts indicate it may needs as much as Rs500 billion more than it has. And everyone seems to be suggesting that whether it is through the provinces or through the federal government, but basically Pakistanis should be punished with even lower quality and lower coverage of services than before the PTI came to power.

Finance Minister Asad Umar therefore has a fiscal problem of prioritisation and allocations that he needs to solve, in a manner that is cognizant of accounting realities, but geared to solving not accounting, but political puzzles.

Second, there are only four ways to increase the money available to the government. One, it can raise taxes (and it should), but this will not produce the kind of increases in cash for the government that it needs until about twelve months from now. It needs money right now. Two, it can reduce expenditures – what economists call austerity. But this is death for the people: no example in modern history exists in which the net welfare function of the people of a country has improved through a net reduction in the services that the state provides (including security). Any measures that cut education, health, water, BISP, police, or defence expenditures do not deserve to be entertained for a moment.

Three, it can print money and, whilst conventional neoliberal economic theory suggests that this is an unwise path to solving a cash crunch, there are increasingly complex and compelling arguments that the sovereign power to print cash (through what we call the State Bank of Pakistan) is not as dangerous or harmful as the Bretton Woods institutions would have us believe. There are limits to the application of these arguments, and Modern Monetary Theory applies less to countries with weak currencies than it does to full sovereign currency regimes like the US and the UK. Which brings us to the fourth and final way in which governments can increase the money available to them: they can take foreign currency loans.

The decision to increase Pakistan’s US dollar denominated debt is not just up to the finance minister. It requires the assent and input of the Minister for Foreign Affairs, Shah Mehmood Qureshi. SMQ needs to have a view on the expanding debt portfolio of Pakistan that is informed not only by accounting or economic or fiscal or even monetary policy concerns – but also national security concerns. How many dollars are too many? And, more importantly, which creditors should have the power to dictate their terms for taking on Pakistan as a debtor: China, Saudi Arabia, the IMF? What are the costs and benefits, in the medium and long terms, of each option?

SMQ therefore has a problem of prioritisation of creditors that he needs to solve, in a manner that is cognizant of Pakistan’s national security, but geared to solving not security, but accounting puzzles.

In all of this, Jahangir Tareen and the rest of the PTI brain trust also face the problem of walking back some of the silliness that PM Khan has invested in over the last decade. A 2013 World Bank study of South Asia’s infrastructure needs indicates that Pakistan’s total infrastructure needs for the decade between 2011 and 2020 are between $116 billion and $165 billion. Estimates for GDP elasticity of infrastructure range from 0.07 to 0.15, which means that doubling infrastructure spending leads to anywhere between a 7 and 15 percent increase in GDP. These are not small increases (a five percent increase in GDP is worth over $15 billion.

So what then is the optimal equilibrium between too little coordination across the key functions of government, and too much? Only PM Khan can determine this. He may want to begin by ensuring that everybody does what they are best at. Information Minister Fawad Chaudhry should certainly continue to run information operations that keep the PTI’s mainstream voters sated, with pictures of how many biscuits are served at press briefings. But it would be less optimal for Dr Ishrat Husain, Razak Dawood and Asad Umar to also become delivery instruments of these kinds of talking points.

If the PTI is to succeed in governing, where the PML-N failed, it will need to treat the macroeconomic, national security and foreign policy challenges that Pakistan faces with much more seriousness than what was exposed in the cabinet agendas shared with the media last week. (JKT come home?)

The writer is an analyst and commentator.

www.mosharrafzaidi.com


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