Over the past four years any criticism of the prevailing economic policies were dismissed as anti-government or anti-Pakistan by the Ishaq Dar-led Finance Ministry. And selected extracts from reports by multilaterals/rating agencies as well as the handful of positive reviews by a section of the foreign media were cited as proof positive that the performance of the country’s economy is moving in the right direction. Articles appearing in Business Recorder were particularly subject to rebuttals backed by controversial data released by the Pakistan Bureau of Statistics (PBS) which was under Dar’s administrative control and/or favourable analysis by external agencies/media which have been few and far between.
With Nawaz Sharif disqualified and the cabinet dissolved there is little hope that a change in economic policies is imminent. The interim prime minister as well as the prime minister who would take the PML-N into 2018 general elections, selected by Nawaz Sharif after consultations, is most likely to reappoint his entire cabinet with few, if any, exceptions. Dar, with family connections to the elder Sharif, and his political career inextricably linked to the family’s political fortunes, is likely to be included in the remaining tenure of the party. And with this premise in mind today’s article highlights the disturbing analysis of the state of our economy by three of the entities frequently cited by Dar as credible – Moody’s, International Monetary Fund (IMF) and United Nations Development Programme (UNDP) – whose reports were uploaded on their website this month (July). The objective of this exercise is to compel the government to heed their concerns and advice and revisit an entire range of Dar’s flawed policies.
Moody’s and the IMF have projected in their latest reports that all is not well on the China Pakistan Economic Corridor (CPEC) front. Moody’s, in its latest issuer (dated 18 July 2017), noted that CPEC will raise Pakistan government’s debt to around 222 billion dollars in the current fiscal year (around 67 percent of total Gross Domestic Product) and affect the country’s credit profile by increasing the balance of payments pressures at least temporarily. Domestic analysts continue to challenge the GDP figures compiled by the PBS that is under the administrative control of the Ministry of Finance which, in turn, implies that the debt to GDP ratio would be a lot higher in the current fiscal year than the 67 percent projected by Moody’s; in contrast Dar’s projected total public debt to GDP of 61.4 percent for the current year in the budget documents appears to be a pipedream at best or a deliberate attempt to befool the nation at worst. Contracts signed under CPEC’s umbrella continue to be non-transparent prompting several local and foreign agencies as well as multilaterals to make assumptions that are vigorously refuted by former government ministers though without providing conclusive proof of any signed and sealed project specific contract.
Moody’s further noted that the notional (speculative) value of CPEC-related investments is 60 billion dollars of which half (28 billion dollars) is on early harvest projects in energy, transportation and other infrastructure while the remaining investments would occur through 2030 and beyond. And even though the majority of these investments are to be financed through foreign direct investment (around 19 billion dollars), concessional loans (7 billion dollars) and grants 228 million dollars yet as per the International Monetary Fund (IMF) inflows would be 2.2 percent of GDP while outflows would be higher (repatriation of profits having hit a historical high last fiscal year) which would place further pressure on the current account deficit.
Moody’s report also notes that large fiscal deficits due to low incomes, high level of tax exemptions and weak tax compliance and enforcements in spite of the recently completed IMF programme restrict government revenues and reliance on short term borrowing (the government borrowed over 4 billion dollars in 2016-17 from commercial banking sector abroad that accounted for net outflows instead of inflows) and have contributed to “very high gross borrowing requirements”. And most damning of all the report indicates that at around 32 percent of GDP Pakistan’s projected gross borrowing needs for the current year is among the highest of rated sovereigns.
Uploaded by the IMF on its website this month were three disturbing elements in a publication titled ‘Pakistan Selected Issues’. First paper was titled ‘Poverty, Inequality and Social safety Nets in Pakistan’ which concluded that “most countries with a level of public spending on social safety nets close or lower than Pakistan tend to have lower poverty and multidimensional poverty rates;” and similar conclusions were drawn with respect to public spending on education and health. The report also noted that “size of informal sector is estimated to be large, in the range of 30 to 50 percent of the economy, above South Asia average… (and) constrains economic growth and limits the creation of high quality durable jobs.”
The second paper was titled Financial Sector and concluded that “overall index of financial institutions” depth remains low relative to both South Asian peers and emerging markets average” and “from its 2007 peak it has shrunk by about 40 percent reflecting the declining size of the financial sector and the private credit to GDP ratio.” And “few firms have access to bank loans or enjoy a credit line, as per World Bank’s Findex data, less than 10 percent of adult population have accounts with formal financial institutions….” State Bank of Pakistan Survey for 2008-15 notes that “numbers formally served by financial system increased from 12 to 23 percent…major gaps remain” and yet again “Pakistan ranks very low against peers” and “financial exclusion of women, rural population and small and medium enterprises persists.” This in turn raises questions about claims made in the Economic Survey 2016-17 notably that small manufacturing increased by a whopping 8.2 percent last year.
The final paper titled ‘Fiscal Decentralization and Macroeconomic Challenges’ maintains that international experience suggests that the design of fiscal federalism more than a degree of decentralization affects social and macroeconomic outcomes and argues that the role of fiscal decentralization in the seventh National Finance Commission award has been unbalanced for a number of reasons including: (i) devolution of fiscal resources was not tied to devolution of expenditure, (ii) revenue sharing arrangement posed challenges for fiscal policy making, (iii) devolution was not synchronized with strengthening public financing management frameworks at provincial level; and (iv) the award is silent on joint financing responsibilities. There are a number of recommendations for the next award, however, Ishaq Dar was repeatedly accused of foot dragging in this regard and delayed negotiations till 2017 with few expecting any progress in the remaining tenure of the PML-N.
Finally, the recently released UNDP report titled Development Advocate Pakistan mentioned three additional disturbing elements prevalent in the economy that have been cited by Business Recorder as well as local economists for decades, however more urgently during the past four years: (i) Pakistan’s market share in exports has declined from 0.15 percent to 0.12 percent with exports now financing only 50 percent of imports in contrast to 80 percent in the early 2000 years; the report attributes this to declining competitiveness due to “penal tax regime, energy shortages, bureaucratic hassles, high import tariffs and lack of co-ordination between government tiers and departments”; (ii) the Federal Board of Revenue needs to simplify the tax code, its administration made hassle and corruption free, audit function strengthened and improved, tax facilitation made payer centric and alternative dispute resolution pout in place; and (iii) unless distribution companies (Discos) are set right fiscal losses (in the energy sector) would continue unabated.
There is therefore an emergent need for the next prime minister to revisit some of the policies during the last four years. However one would be forced to remain sceptical if Dar succeeds in retaining his pervasive control over the Finance Ministry and all its affiliated departments/organizations.