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Dr. Ikramul Haq & Abdul Rauf Shakoori
The continuous economic woes of Pakistan are making the lives of the common people more and more miserable with every passing day. The financial wizard of the ruling party, Pakistan Muslim League Nawaz (PMLN), Muhammad Ishaq Dar, 72, came back to Pakistan after five years’ self-imposed exile in London on September 27, 2022, took oath first as a Senator and later as Federal Finance Minister for the fourth time, appears to be uneasy after his recent return from Washington. The confidence, he showed to fix the economy after taking oath, now appearing to be shaken, after meeting with the global lenders. Though he claimed to have a vast experience in dealing with these financial institutions, in the last five years things have changed substantially and his traditional approach to manage the economy, many experts claim, would no longer be effective as it was the case, in the past.
The way economy was run by the four finance ministers under the tenure of Pakistan Tehreek-e-Insaf (PTI) not only burdened the country with huge debts but also pushed the economy towards high inflation and unemployment, besides recording unprecedented fall in Foreign Direct Investment (FDI), historic high policy rates and low GDP growth. After regime change in April 2022, the second time non-elected finance minister, Miftah Ismail, added further economic miseries for the people of Pakistan. In his five-month tenure, he paid more attention to implementing the conditions of the International Monetary Fund (IMF) than seeking justified waivers. There was no imminent threat of external default as repeatedly claimed by Ishaq Dar on the plea that the country had/has always a strong assets-base to mitigate any such risk. The actions of Miftah Ismail not only further enhanced financial woes of the ordinary citizens but he also compromised the political capital of his party to the extent where it could not even win a single seat in bye-elections.
Apart from the imprudent decisions of the previous government, the geo-political tensions like the Russia-Ukraine war and the domestic political instability, and a legacy of macro-economic imbalances and unsustainable policies are becoming the source of our current economic mess.
The economic immaturity and inconsistency is evident from the fact in the last five years (2017-2022), Pakistan witnessed appointment of six finance ministers—everyone employing different approach to handling the economic issues at the cost of consistency in policies, a prerequisite for alluring investment. Unfortunately, majority of them lacked relevant qualifications and experience. In addition to that, our rulers hardly bothered about the economic hardship of the masses and preferred personal gains to the collective. The apt example of it was the violation of the agreement with the IMF by the PTI and extending non-funded subsidies on petroleum products to get political mileage due to the fear of success of motion of no-confidence against their leader Imran Khan.
The resumption of the Extended Fund Facility (EFF) by the IMF under the tenue of Miftah Ismail was subject to the removal of unsustainable subsidies that the current government agreed to re-impose including the petroleum levy that was earlier agreed by PTI government. The IMF country report following the approval of EEF facility of US$ 1.1 billion, confirmed commitment of Pakistan to impose monthly petroleum levy increase of Rs. 10/liter for petrol and Rs 5/liter for diesel on September 1, 2022, followed by increases of Rs. 5/liter per month for both fuels until it reaches RS. 50/liter in January 2023 and April 2023 for petrol and diesel respectively. The PTI’s just one decision to get political mileage placed Pakistan in the position, where the incumbent government was forced to agree with IMF-imposed increase in petrol prices, imposition of petroleum levy of Rs. 50, as well as, new taxes of approximately PKR 2000 billion—all just to obtain US$ 1.17 billion from the IMF.
Subsequently, the situation worsened further when unprecedented flash floods hit Pakistan, the initial financial loss of which is estimated beyond US$ 30 billion. In the backdrop of this catastrophic situation, Pakistan has raised an SOS call to the global lender to ease out the terms attached to IMF’s programme. At the same time, the government is looking forward to rescheduling its debts, other than commercial loans, to create a breathing space for its dwindling reserves.
The IMF representative team will be visiting Pakistan next month to meet Pakistani authorities for the next review. IMF has already indicated that it might need to update its numbers. However, they are looking forward to the damage/loss assessment by World Bank and United Nations Development Programme (UNDP), which will help them to better estimate the impacts on the economy and the society.
Coming back to the visit of Ishaq Dar to the United States, meeting with officials of the World Bank, IMF, and Asian Development Bank, he apprised them about the current challenges Pakistan was facing because of catastrophic floods. Ishaq Dar worked hard to generate adequate support to meet the challenges of recovery and rehabilitation for which he urged the IMF to tailor its response to help Pakistan in combatting the economic and social challenges arising out of the global geopolitical situation and climate changes.
The President Asian Development Bank (ADB), Masatsugu Asakawa assured that ADB would continue to support Pakistan and facilitate fast-track approval and disbursement under the Balochistan Rural Development and Community Empowerment (BRACE) programme amounting to US$ 1.5 billion.
The Federal Finance Minister also led Pakistan’s delegation in a high-level meeting on the flood situation—this event was organized by the World Bank. The session was attended by senior representatives of all major bilateral and multilateral partners and donors where initial findings of need assessment for Pakistan vis-a-vis post-flood disaster were presented. These findings are jointly prepared by the ADP, UNDP, European Union (EU), World Bank, and the government of Pakistan.
Though all these initiatives will benefit us in the future, the current biggest challenge for Ishaq Dar is to scale down the pace of inflation and provide an enabling environment for businesses where they can sustain and flourish. It is apparent that the major contributor and key trigger for inflation are high fuel prices, and it has a tri-fold structure. It starts with the high price in the global market, mainly due to geopolitical conflicts, secondly, the Pak rupee has significantly lost its value which automatically increases the ex-refinery price currency, and lastly, it is heavily burdened with petroleum levy as agreed with IMF.
The recent announcement of petroleum prices is indicative of the fact that Pakistan has not been able to get any respite from IMF. The petroleum levy has been significantly increased from Rs. 32 p/liter to Rs. 47 per liter, which depicts a significant increase of 46%. Meaning thereby that the relief, which could have otherwise been extended, to the public is consumed in heavy taxes as a revenue-generating measure. Although the target of Rs. 50 p/liter was to be achieved by January 2023, the accelerated pace of micro and macro-economic adjustments proved to be detrimental to a domestic economy where businesses across the board, large, medium, and small find it difficult to align themselves with new cost structures.
Similarly, a high tide of inflation leading to a hyper increase in energy and food commodities prices has almost drowned the lower-income groups. However, in the current situation, it seems that the government of Pakistan is least interested to ease inflationary pressure from the masses, rather it is only looking forward to generating revenue at a faster pace without taking cognizance of the fact that its political equity has been fast amortizing at the pace identical to depleting purchasing power of people and decreasing level of economic activity in Pakistan.
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Dr. Ikramul Haq, Advocate Supreme Court, and writer are an Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance. They have recently coauthored a book, Pakistan Tackling FATF: Challenges and Solutions with Huzaima Bukhari.