Special Feature

Either way, the news is bad

21 Apr,2019

S Akbar Zaidi:

WHEN Asad Umar, the finance minister of Pakistan, returned from Washington after attending the Spring meetings of the International Monetary Fund and the World Bank a few days ago, the first task he had in front of him was to deny the strong rumours that he was being demoted to be the petroleum minister. The rumours died down at that moment, but on Thursday, he was sent packing. He was, indeed, offered the petroleum ministry, which he has declined. (Dr Abdul Hafeez Sheikh, a former adviser under General Musharraf, has been named the adviser on finance, adding to the growing list of the Musharraf cabinet in this current government.) At a moment when Pakistan’s economy is facing a major crisis, it also has no finance minister now. Whoever will take the new job will have to face challenges they may neither be prepared for nor experienced enough to deal with.

In free-fall mode
PAKISTAN’S economy has been ruined in the last eight months since when Imran Khan became prime minister and his party, the Pakistan Tehreek-e-Insaf formed the government. Almost every indicator has deteriorated substantially. For example, inflation, at 9.4 per cent, is at its highest level in five-and-a-half years and is likely to rise to double digits for the months ahead. The rupee continues to lose value every other day, which adds to further inflation especially with the oil price on the way up. More devaluation is expected over the next few months especially when the government gives in to yet another IMF programme. The fiscal deficit is about to hit more than 6 per cent of GDP, and even a cut in development expenditure will not stop this rot, as defence spending and interest payments continue to rise. Pakistan’s exports which have been stuck at around $26 bn for years, despite the 35 per cent devaluation of the rupee over one year, have barely budged. The government owes power producing companies huge amounts of money — known as the circular debt — which continues to accumulate, and interest rates are also going up making the cost of business even more uncompetitive. The State Bank of Pakistan recently lowered the expectations of the GDP growth for the current fiscal year to an eight-year low, to around 3.5 per cent, an estimate which was reduced further by the IMF and the World Bank to a dismal 2.9 per cent for the current fiscal year, and expected to fall further over the next three years. The GDP grew by 5.8 per cent in the last fiscal year, the highest in 13 years. By all accounts, Pakistan’s economy is in a dismal state.

Key factors
A MAJOR reason why the economy has taken such a sharp plunge, with GDP growth being halved within a year, is on account of the mismanagement and incompetence of the current government and by its economic team. On top of that, there has been the hubris led by and manifested in Khan, once saying that he would rather commit suicide than go to the IMF, popular slogans when one is the main nuisance factor in the opposition, but quite embarrassing as prime minister of a country facing a major economic meltdown.
The economic problem Pakistan faces at the moment, has two aspects to it, and is a major case of ‘damned if you do and damned if you don’t’. One reason why Pakistan’s economy is in such a mess is because the arrogance and bravado of Khan, which was mimicked by his economic and finance team, has come to haunt all of them. For eight months the economy has been mismanaged because of the fact that the then newly-elected government in August did not do what it should have. It was almost certain that whichever party would have won the elections of July 2018, it would ask the IMF for a major structural adjustment loan. At that time, there did not seem to be many alternatives. Mr. Khan’s strategy was to run to a few of Pakistan’s friends begging for money, and to not bow his head in front of the IMF. By not submitting to the IMF then, they now have no option but to submit almost a year later. A non-IMF policy and programme was always preferred and a better option in August last year, but the incompetence of Mr. Khan, matched with vanity, did not allow for reforms to be undertaken, and has only made matters far worse.
So, after having said that they won’t go to the IMF, that’s exactly where they are now. From finding (and failing at) alternatives to revive Pakistan’s economy, the finance minister has had to find ways to convince the IMF that Pakistan needs the IMF. The reasons for the rumours of him being dismissed from his post, should have been based on his poor performance of running the economy, but they shifted to how he wasn’t able to cut an IMF deal a few days ago when he was in Washington. The fact that he was not able to meet the US Treasury secretary, Steven Mnuchin, nor the IMF head, Christine Lagarde, on this visit, was seen as yet another sign of this failure by the Pakistani media. Nevertheless, the IMF deal is now a certainty, and although the finance minister has been replaced, there was probably no need for a replacement. When the IMF implements its strict conditionalities and adjustment programme, to which the finance minister and the country supposedly ‘agree’, the finance minister becomes redundant and is simply the bearer and front for bad news and tough conditions. The new finance adviser will fit this role perfectly.

Tough road ahead
THE new IMF programme, the biggest Pakistan is expecting to receive, to be between $6–$10 billion, which is almost a certainty now, is going to make things far worse for all Pakistanis, and especially for the working people already dealing with prospects of a marked economic slowdown and high and rising inflation. The IMF will further cut the minuscule development expenditure left, although defence spending will remain a matter of ‘national security’ never discussed in Parliament, hence, not to be touched. The IMF will ensure austerity, stabilisation and will cut the growth rate further. It will insist on further devaluation, or ‘adjustment’ of the rupee, as it calls it, causing greater inflation, and will insist on raising utility prices. In every respect, the people of Pakistan will face the prospects of fewer jobs, rising prices and an economy which is now the worst performer in all of South Asia.
This will be the 13th IMF rescue package for Pakistan’s governments and its elites in less than four decades. Each time there is an economic crisis created due to mismanagement, the elite remain under-taxed, the IMF and World Bank jump in to save them. Usually, Pakistan’s governments in the past, especially the military, leverage Pakistan’s so-called geostrategic position and situation and gain undue access, with the U.S. having been Pakistan’s biggest champion and supporter. As global power shifts and the region changes, so has Pakistan’s position in it. One of the stumbling blocks to the deal this time has been the IMF’s insistence that Pakistan reveal the financial deals made with China, including financial loans, as well as the $60 billion China-Pakistan Economic Corridor. If Pakistan doesn’t take the IMF loan, it is in a mess. If it takes the loan, it is in a bigger mess. Either way, the news is bad.

TheHindu.com, April 20. S Akbar Zaidi is a political economist based in Karachi. He teaches at Columbia University in New York, and at the IBA in Karachi.

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