Trouble at the starting line

RARELY have I seen such chaos as today, at least in the area of economic management. At the epicenter of the chaos is the IMF program, which is nicely revamped but is not moving forward. On July 12, more than five weeks ago, the Fund announced a staff-level agreement (SLA). On July 23, on the eve of his departure for China, the finance minister assured the country in a television interview that the board's approval of the program would be achieved by the end of August.

After his return from China, we learned that the government had raised the issue of rescheduling some debt obligations to sponsors of Chinese power producers, as well as providing guarantees for early repayments for maturing debts to Chinese commercial banks and others. We were also informed that the process of obtaining all of these obligations had begun during the visit. This meant that after a long and arduous journey, we had finally reached the starting point of our goal.

Now comes the hard part. Getting the Chinese to actually agree to these guarantees and debt restructuring requests may be more difficult to achieve than initially thought. Meanwhile, the Executive Committee's calendar for the remaining days of August was released last week, and Pakistan was not listed on it. Yesterday (21 August), the same Finance Minister assured a parliamentary committee that approval would come in September, and mentioned something about a “deposit insurance bill” that would need to be passed by October as a possible item still being discussed with the Fund's staff before the program could be submitted to the Board for approval.

That's how it looks. The IMF asked them to get certain conditions approved by the Chinese before they could expect board approval. They appealed to the Chinese, who were unlikely to be happy with the demand, and urged their Pakistani friends to stand firm against Western pressure and attempts to drive a wedge between the Iron Brothers. If Chinese debt obligations required restructuring or similar treatment, they were told, then this would have to be discussed with the companies to whom the debt was owed.

What kind of vision will Ishaq Dar develop that he hasn't already developed in the past?

This is not what the Pakistani side wanted to hear. It would have been a laborious and lengthy task to contact each project sponsor, each commercial bank and each state-owned enterprise where the debt was due individually. They were probably hoping to simply talk to someone high enough in the state who could simply give the necessary instructions to get all this done. But the Chinese state is not a monolith, although it is a one-party state.

It seemed there was no way out. So, upon their return, it was solemnly and reluctantly announced that a consultant would be engaged and a broad front opened with the many categories of Chinese creditors to obtain the necessary assurances to forward the SLA for board approval.

Meanwhile, the Prime Minister had announced with some fanfare the formation of a task force headed by Stefan Dercon, the celebrated Oxford academic who has written an influential book on how countries approach the process of economic reform. However, when the first draft of the report prepared by the task force was presented to the Prime Minister, he was unimpressed, dissolved the task force and appointed a new one headed by former finance minister and PML-N leader Ishaq Dar.

Back to square one. Dar is one of the party's oldest members; he has been with it since its first term in power in the early 1990s and has served as finance minister at least three times. Each time he set the stage for the country to come close to a balance of payments crisis. His views on economic matters are strange. He seems to believe that Pakistan has unlimited borrowing capacity and its economy can afford to grow at a rate that depletes its foreign exchange reserves, provided he can continue to replenish those reserves with borrowed money.

What vision will he develop that he has not already developed in the past? And if every term as finance minister has ended with the country either drifting dangerously towards or on the brink of default, what is the point of bringing him back for a fourth time to develop the overall vision that this government wants to pursue?

Meanwhile, the ruling party is already reeling from the tariff hikes it had to push through. However, some tariff hikes have been held back to mitigate the impact on citizens, so another hike will have to be made in the coming months. Meanwhile, electricity bills at the new rates have started arriving and there is an outcry across the country. In one case I witnessed, the price per unit for a person whose consumption is always just below or above 200 units went up from Rs 20 in the July bill to Rs 51 in the August bill.

The ruling party responded by announcing a “temporary relief package” by diverting development funds into a power subsidy to be funded by the Punjab government. That's fine, but power prices are actually rising because of the kind of macroeconomic policies Mr Dar usually implements, which put massive pressure on the economy that ultimately has to be relieved through massive devaluation, skyrocketing taxes and power price hikes. So what's the point of entrusting Mr Dar with the government's economic vision while he is scrambling to organize “temporary relief” for consumers from crippling power price hikes? This government is now clearly in reaction mode and has lost the initiative when it comes to economic matters. It has run into trouble right at the starting line.

The author is a business journalist.

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X: @khurramhusain

Published in Dawn, 22 August 2024