Integration of political and economic factors?


Political as opposed to economic compulsions of a sitting government are understood only by those who have been in government – a reality rudely brought home to Prime Minister Imran Khan after his 2018 electoral win.

This has been acknowledged by the Prime Minister in public statements, maintaining that he and his team were inexperienced, though half of the members of the team have either held portfolios in previous administrations or were declared ‘experts’.

The economic team hired by the Prime Minister in 2019 – Dr Hafeez Sheikh to head the Finance Ministry on 24 April and Dr Reza Baqir as Governor State Bank of Pakistan on 6 May – agreed to or had to agree to, depending on which side of the political divide one is, an extremely harsh front loaded International Monetary Fund (IMF) programme that stifled economic activity that fuelled unemployment while projecting a rate of inflation of 13 percent based on raising tariffs (electricity) as well as higher tax collections as a prelude to agreed structural reforms.

Three years down the road, tariffs continue to rise – an IMF condition for the successful completion of the sixth review, while structural reforms remain pending – reforms that include: (i) zero rise in the flow of circular debt which implies higher tariffs and better performance of our distribution companies.

Disturbingly, the Khan administration has consistently failed to adhere to the principle of economic merit order (EMO) due partly to the inordinate delay in importing RLNG three years running that prompted the generation companies to rely on more expensive imported fuels and partly due to sustained poor performance of the sector; (ii) failure of the government to widen the tax net, a policy decision that was proactively taken more than two decades ago but which remains unimplemented to this day due to the failure of successive governments, including the incumbent, to face off violent protests that have sadly become the norm in this country; and (iii) the state-owned entities, including the white elephants Pakistan Steel (non-operational since 2015 but requiring millions of rupees annual injections to pay salaries), Pakistan International Airlines and Pakistan Railways, continue to be a heavy drain on scarce government resources.

However, in all fairness, it must be acknowledged that the 2019 economic team leaders no doubt accepted the harsh upfront conditions based on the fact that the Khan administration was still in the honeymoon period and the ensuing pain would be endured by the people more readily hoping for a better tomorrow under the PTI government. However, this was not to be. With two months into the fourth year of the five-year tenure of the incumbent government the sharp spurt in inflation and the continuing fragility on the external account continue to remain a worry.

The situation now with the next elections on the horizon is markedly different and political considerations far outweigh economic considerations – an assertion backed by the recent refusal of the Prime Minister to raise petroleum and products prices as recommended by Oil and Gas Regulatory Authority which, in turn, is based on three factors: (i) the international prices of petroleum and products; (ii) the existing taxes plus petroleum levy which was reduced massively last month; and (iii) the rupee erosion that is the reason for the high price of these products today as opposed to in 2007-08 when the rupee/dollar parity was much lower even though the per barrel cost was 140 dollars while today it is less than 86. True that the Saudi injection of 3 billion dollars as well as the 1.2 billion dollar deferred oil facility has strengthened the rupee but not significantly.

The 2019 EFF programme’s focus on primary deficit as opposed to fiscal deficit as in earlier Fund programmes was the reason behind the massive escalation in the budget outlay from 5.1 trillion rupees in 2017-18 to 8.4 trillion rupees today which was funded by (a) rise in domestic debt from 16.5 trillion rupees to 26 trillion rupees today and (b) 125.6 billion dollars external debt against 95 billion dollars inherited in 2018 by the government. However, failure to remain on the Fund programme would ante up the cost of borrowing further.

In this scenario, the spectre of accepting IMF conditions for the successful completion of the sixth review must be politically daunting for the reason that contractionary fiscal and monetary policies would not only stifle growth, thereby impacting on inflation as well as the revenue collection target but without a commensurate increase in incomes would generate violent protests and seriously undermine the Prime Minister’s political credentials.

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