Change of guard

Insight

The much awaited appointments finally came. Apparently several weeks of standstill at the ministry of finance impelled the Prime Minister Shahid Khaqan Abbasi to shake-up his economic team. Miftah Ismail, advisor to the PM on finance and Rana Muhammad Afzal, minister of state for finance, have been tasked to manage economic challenges arising out of bloated twin deficits.

The twin - budget deficit and current account deficit - are again posing threats to the economy of Pakistan and if remedial measures are not taken promptly, there would be no way to dodge the looming crisis over the next six to nine months period.

For the present government, the sailing is not smooth and the possibility of political upheaval is on the horizon in view of the upcoming Senate elections due in March 2018. The incumbent Pakistan Muslim League-Nawaz (PML-N) regime only has five months to complete its five-year tenure.

Instead of envisaging ambitious plans, it is the basic responsibility of the economic managers to avoid eruption of major crisis like situation as one major debt instalment is due this month. The government would have to rely on managing short-term borrowings to avoid depletion of the foreign currency reserves, and this borrowing must be managed at competitive and reduced rates.

The first and foremost challenge lying in front of the economic team is to ensure close coordination among three key office holders, including advisor to the PM on finance Miftah Ismail, minister of state for dinance Rana Afzal and special assistant to the PM on revenues Haroon Akhtar Khan during the remaining period of the tenure of the incumbent PML-N led regime. This would help formulate and execute internal and external policies of economy in a coordinated and harmonised manner.

Without having clear cut divisions in work and mandate, it would be hard for three offices to devise an effective strategy and execute it on economic front in the coming five to six months period. The economic challenges are enormous in nature so require the same kind of response to come out of the crisis mode.

Slight lack of coordination came to surface in the days following the appointments when the prime minister convened an important meeting on economic and revenue reforms. During the meeting, when the proposed tax amnesty scheme for bringing back foreign assets at fixed rates came under discussion, the participants failed to strike a consensus over the course of action the government could adopt to achieve the desired results.

This lack of coordination could become a major hurdle in crisis handling and resolutions and the planners must focus on sorting these matters out for the smooth economic sailing. Establishing close coordination among the three office holders is important to resolve the challenges, especially the twin deficits.

Soon after assuming charge of as advisor, Miftah Ismail, while talking to this scribe had said that he believed on working like a team. “There would be no problem for having close coordination with Rana Afzal being a senior political colleague,” Ismail said.

Another matter to look at is the incumbent finance secretary Shahid Mehmood’s superannuation this week. It is now up to Prime Minister Abbasi to either select a new finance secretary, or grant an extension to the current secretary for a few months. Although, an extension for Shahdi Mehmood is already on the cards, Ismail has also put his weight in favour of the extension to ensure continuity of economic policies during the remaining tenure of the incumbent PML-N government. The final decision to this effect will be taken by the premier in coming week.

There is an urgent need to devise short to medium-term plans to fix the monsters of the budget and current account deficits the country is facing. If the whole economic team is put in place this week, the government should be able to devise a plan to address the deficits in the second half (January to June) of the current financial year 2017/18.

The economic team met with the International Monetary Fund (IMF) for devising macroeconomic framework. It later sent the revised framework to Prime Minister Abbasi for his approval on the adjustments made in the macroeconomic figures for the current fiscal year.

There has been inherent and fundamental flaw in the economic policy. It mainly consists of boom-bust cycles. Whenever the country’s economy grew by achieving higher gross domestic product (GDP) growth, it caused the economy to plunge into macroeconomic imbalances. As a result, the country was forced to approach the IMF for restoring macroeconomic health.

The same old story is repeating itself. Pakistan had macroeconomic stability in the last four years mainly when it was under the IMF programme. The country’s GDP growth touched 5.3 percent for the last financial year 2016-17; highest growth in the last nine years. The growth on average stood at below three percent during the Pakistan Peoples’ Party regime from 2007-8 to 2012-13.

Now, the IMF has projected GDP growth of 5.6 percent for 2017-18, while Pakistan is eying to touch six percent growth rate. Inflation, which remained lower, is also projected to remain in single digit, although, its pressures have started mounting.

With higher growth trajectory, the country slides into the danger zone of expanding twin deficits. These deficits are bound to go up when there is more demand in the economy. However, the consistent failure to manage these deficits could force the managers to seek external help from international financial institutions (IFIs).

Similar to what happened in the past; the ‘one shoe fits all’ formula of suppressing demand would be used to restore macroeconomic stability, which simultaneously strangulates economic growth.

There is a need to find policies to avoid repeating the same old mistakes instead.

Renowned economist and former deputy chairman planning commission Dr Nadeem Ul Haq said this boom-bust cycle would continue to surface again and again until and unless the basic structure of the economy was not altered altogether.

Haq said wrong taxation policies and unbridled expenditure policies needed to be changed. “The ECC (Economic Coordination Committee of the cabinet) should be abolished as it had become a tool of doling out national exchequer without defining any clear cut objectives,” he added.

“The exchange rate was artificially managed for long that had now caused losses to different sectors of the economy,” he said, and argued that the cities were the engines of growth.

There was need for a paradigm shift by ensuring vertical growth to bring the desired shift in momentum instead of focusing only on horizontal model of growth.

The writer is a staff member