Money Matters

Sticky opinions

By Ihtasham Ul Haque
Mon, 07, 17


All official projections and estimates set for 2017-18 are fast getting unattainable mainly due to the political battle on Panama leaks, with International Monitory Fund (IMF) painting a depressing picture of the struggling economy for the first time.

The political battle has been ongoing for the past 15 months. The IMF has said new taxes, worth Rs425 billion, would have to be imposed and all new subsidies withdrawn to pull through the current financial year.

This is happening for the first time in the country’s 70 years history that budget estimates are projected to be significantly readjusted by having new taxes in the very first month of any financial year. It is also happening for the first time that IMF-led International Financial Institutions (IFIs) and independent economists are on the same page to say that all is not well on both the internal and external fronts and that the year 2017-18 would be the toughest year in terms of meeting its goals.

The fund officials have communicated to the Dar-led economic team that the entire tax and non-tax revenue of the Federal Board of Revenue (FBR) would have to be increased from Rs4.9 trillion to Rs5.4 trillion to avoid a crisis that has essentially been exacerbated because of the case against the ruling family in the Supreme Court.

The current budget, insiders maintain, has been rendered unworkable as the government is virtually dysfunctional and implementation of the “election budget” has become a serious challenge.

Since the vulnerabilities on the external front are also increasing, the government has been told by its planners that $21 billion foreign financing was required to avoid a default situation, as the current $16 billion foreign exchange reserves of the central bank were insufficient to meet the requirements.

According to the IMF estimates, Pakistan’s external financing would be close to eight percent of the GDP in the medium term to plug the financing gap in 2017-18, considering the falling foreign exchange reserves and plunging foreign direct investments (FDI). The $2.4 billion FDI inflow has mainly been from China in the wake of the China-Pakistan Economic Corridor (CPEC) projects.

The external sector is becoming a real headache due to failing exports and falling home remittances. More problems are being faced in the wake of over $21 billion trade gap and $10.1 billion current account deficit in 2017-18.

By 2018-19 this deficit is estimated to be $11.6 billion.

The question being debated in official and unofficial quarters is when Pakistan would go to the IMF for emergency assistance. The World Bank and the Asian Development Bank (ADB) have reportedly expressed their inability to offer new loan facility, unless the IMF gives a clean bill of health to the Pakistani economy and that a major effort is needed to improve both the internal and external financing sectors. So would be the attitude of global debt capital market which has been toeing the line of the World Bank and ADB.

Surprisingly the IMF, which used to ignore basic fundamentals and kept extending waiver after waiver during all the 12 reviews of $6.2 billion Extended Fund Facility (EFF) programme, was now getting tough and reportedly putting new conditions to offer any bailout package.

Fund officials are expected to demand to give preference to austerity over growth to ensure that the increasing fiscal deficit does not go beyond certain limits. The reason it is being expected has to do with how the fund ensured the government focused on strict financial discipline in the past compared to growth. Whenever Pakistan opted for the IMF programme in the past, it had to forget about growth and focus on austerity.

Now when Pakistan is once again facing a serious balance of payment problem, new avenues of external inflows are also being discussed including from China that has provided $500 million soft loan a couple of months ago.

However, there are reports that the Chinese government is reluctant to offer fresh loans other than the amount pledged for the $54 billion CPEC project, which gives credence to the views that only the IMF would be forthcoming to rescue Pakistan, and that would happen only on tough conditions.

“Our economy cannot sustain this ongoing political battle being fought in the apex court by the government and the opposition,” said renowned economist Dr Ashfaque Hasan Khan.

He asked who did not know that growing political uncertainty was gravely impacting the country’s fragile economy which must be ended forthwith to avoid further damage. “It will take minimum three years to bring the economy back on the April 16 position as the government is at a standstill and all its functionaries are waiting for the outcome of the Panama issue,” Dr Khan said.

He appealed to the Supreme Court to decide the issue quickly as the prolonged hearings on Panama scandal have brought irreparable damage to the economy. “But I do hope that dust will settle as soon as the decision on Panama comes and this uncertainty goes which is poisonous to the economy,” he added.

Former minister for commerce Dr Zubair Khan said rising political instability was causing more and more problems to the economy which he alleged has thoroughly been destroyed by federal finance minister Ishaq Dar. “But I am sure the rampant corruption will be minimised to a great extent after a judgement by the Supreme Court over Panama scandal,” he said, and added that the current budget provided ample opportunities to the PML-N legislators to indulge in loot and plunder to win the next election.

“Those development projects are being installed which offer kickbacks and commissions to the rulers and their party men,” the former minister for commerce said. “They must go if at all you want to save your country and your economy,” Dr Khan said.

With the talk of new emergency lending from the IMF, emerging reports suggest that the fund officials are concerned over the government’s move to understate the budget deficit by including the same amount of Rs64 billion as non-tax revenue in the last financial year after it already booked the money as part of its earnings from Saudi Arabian gift of $1.5 billion two years ago.

The issue concerned the independent economists who had been alleging all along that the government was involved in figure fudging and that Pakistan Bureau of Statistics (PBS) was involved in it to show lower fiscal deficit. The issue now, it is said, could be raised by the IMF when Islamabad goes to the Washington-based lending agency for new funding arrangements.

Since no single item can be booked twice, IMF may take serious notice by putting a penalty on the government as it was done immediately when former dictator Pervez Musharraf took over and the then finance minister Shaukat Aziz informed that the second PML-N government was involved in figure fudging. The IMF fined Pakistan with $25 million when informed about that serious discrepancy.

The PML-N government has reportedly shown Rs64 billion as sale proceeds of the government-owned LNG-based power plants being set up in Punjab in a bid to cover-up the issue. The budget for 2017-18 talks about this understatement and overstatement without discussing the facts, which according to the independent economists, was figure fudging indulged in by the Dar-led economic team.

Senior economists say that revenues are grossly overstated and expenditure understated to arrive at illusionary or slogan-oriented budget deficit numbers. They also believe that this was happening on such a large scale for the first time in the country.

They say never before in Pakistan’s history have people witnessed such large scale manipulation of statistics, especially in the areas of economic growth, revenues, expenditures and budget deficit. These manipulations were done for point scoring with a view to show good performance of the economy and meeting the IMF targets. This has largely damaged the reputation of the statistics bureau and to some extent the Federal Board of Revenue (FBR).

But many believe that the country’s balance of payment problem is more serious than revenues, and more pressures could be experienced in 2017-18 because of unprecedented surge in imports, now reaching close to $45 billion compared to $21 billion of exports. The matter is worsening with the passage of every day as the government has been informed that United States would no more be disbursing any amount under the head of Coalition Support Fund (CSF) due to which current account deficit is further widening.

Lower exports and remittances coupled with decreasing inflows from IFIs and bilateral creditors are becoming a matter of grave concern for everybody.

In this backdrop, it was being said that the current budget represents the expansionary nature of the fiscal policy being pursued by the government. The balance of payment problem would be haunting with serious consequences due to easy expansionary monetary policy on the one hand and unsuitable exchange rate policy on the other hand during 2017-18.

The falling reserves of the State Bank of Pakistan (SBP) are also becoming a serious issue despite the fact that $3.5 billion were borrowed from the commercial banks. These reserves stood at $12.2 billion as of June 2, 2017 and not $15.7 billion as reported by the central bank. Why have they borrowed from the commercial banks when their position was all ok as given to understand by both the Ministry of Finance and the central bank? Have they informed the IMF? Certainty not, as the government is no more in the IMF programme and that is why it also borrowed Rs2 trillion (Rs2,000 billion) to pull through the last financial year.

Similarly, large scale deficit financing (printing of notes) by the SBP was done in 2016-17 as soon the government went out of the IMF programme in October last year with IMF officials keeping quiet over it prompting the independent economists to say that they were partner in crime and did not raise any objection because they never wanted the government to experience serious financial difficulties. But now the situation is different as the IMF does not have any pressure from the State Department to oblige Pakistan.

Rather, the fund officials would get tough to ensure the recovery of loans in time if Pakistan decided to seek another bailout package, which according to observers, is a matter of time considering the weak position of the economy.

Also the Trump administration which has already cut Pakistan’s economic and military assistance at the behest of India loving Senators and House representatives, it is expected to ask the IMF to offer new loaning facility to Pakistan on tough conditions with a view to force Islamabad to come to terms on Afghanistan which is being supported by the current BJP-led government in India.

Going forward, the implementation of the current budget will set future direction in the emerging political scenario, which has been marred by the ugly politics of survival by the major players. What kind of corrective measures the government is taking to revive the economy is anybody’s guess, considering the fact it is stuck in deep political quagmire.

The writer is a senior journalist based in Islamabad


“Rising political instability is causing more and more problems to the economy which has thoroughly been destroyed...But I am sure the rampant corruption will be minimised to a great extent after a judgement by the Supreme Court over Panama scandal. Those development projects are being installed which offer kickbacks and commissions to the rulers and their party men.”

Dr Zubair Khan, former  commerce minister


“Our economy cannot sustain this ongoing political battle being fought in the apex court by the government and the opposition...It will take minimum three years to bring the economy back on the April 16 position as the government is at a standstill and all its functionaries are waiting for the outcome of the Panama issue.”

Dr Ashfaque Hasan Khan, economist