Data mining has taken two basic forms: (i) those finance ministers with insufficient academic background in economics, including commercial bankers like Shaukat Aziz and accountants like Ishaq Dar, simply changed the macroeconomic indicator (example growth, inflation) that reflected badly on their performance without bothering to also alter its constituents; (ii) economists on the other hand changed the weightage of the constituent(s) of a key macroeconomic indicator with the same objective: to bring it to a level that reflected well on their performance, an example being Hafeez Sheikh's decision during PPP's rule to reduce the food weightage in the calculation of the consumer price index by 6 percent. This explains why it has been relatively easier to compute the extent of data mining by finance ministers without the requisite academic background and for the need to be fully alert to ferret out how much data mining has been implemented by qualified economists.
So what happens to data mining when a non-economist finance minister, Asad Umer, is replaced with an economist, Hafeez Sheikh? And more to the point what happens if the mined data is used to formulate a budget under the guidance and watchful eyes of the International Monetary Fund (IMF) under a 6 billion dollar Extended Fund Facility?
The discrepancies between the claims made in the 2019-20 budget documents on the performance of key macroeconomic indicators pertaining to fiscal year 2018-19 and the data released last week titled Summary of Consolidated Federal and Provincial Budgetary Operations 2018-19 are significantly higher than in previous years. There could be two possible reasons for this divergence. First, that Hafeez Sheikh, with the ultimate responsibility for the budget, may have knowingly used the flawed data during negotiations with the Fund to reduce the commensurate impact of the IMF loan conditions. This would achieve little as he would be fully cognizant of the fact that the IMF would demand recalibration of the 'programme conditions' based on the new data which would imply higher taxes and/or lower expenditure in weeks if not days to come. Second, Hafeez Sheikh simply did not bother to check the data and as a former finance minister who had actively engaged in data mining in the past this may be considered to be tantamount to negligence, some may consider it criminal negligence, as the impact on an average income householder with the anticipated recalibration by the IMF would be considerably more than is currently being borne by him/her.
So what are the major discrepancies between the budget claims and the consolidated budgetary operations? The most disturbing discrepancy is in the budget deficit - from 7.2 percent cited in the budget documents to 8.9 percent in the summary. In other words, the government would have to additionally generate and/or slash expenditure amounting to 892 billion rupees necessitating a mini budget which may be a useless exercise as the existing target of 5.5 trillion rupees is considered to be unrealistic by all but the man who set it, Hafeez Sheikh, and the man who has taken it as a challenge, Shabbar Zaidi. The shortfall in July 2019 collections, 14 billion rupees, is largely attributable to the acceptance of the IMF condition by the economic team to adopt a market based exchange rate. This has negatively impacted on imports with a consequent impact on lowering import duty collections.
The only readily available cash that can be diverted for meeting the 892 billion rupees shortfall is the 115 billion rupees set aside for contingencies which would leave 777 billion rupees to be generated or slashed to meet the conditions agreed with the Fund. If past precedence is anything to go by the major item that would suffer a cut is development expenditure, perhaps the only pro-growth item in the budget given the contraction in large scale manufacturing output as well as small and medium enterprises due to (i) higher input (utility) costs making them uncompetitive and (ii) high cost of borrowing due to high discount rate.
This new data reflects extremely poorly on the performance of Asad Umer who never focused on containing the budget deficit (he is credited with raising the deficit from under 6 percent of GDP to 8.9 percent) and instead spent time on accompanying the Prime Minister in the latter's quest to generate external funding (loans) from friendly countries to meet the current account deficit. In this context it is relevant to note that the majority of arrangements made to close the external financing gap for the first 12 months amounting to 13.5 billion dollars including China 6.3 billion dollars, Saudi Arabia 6.2 billion dollars, and the UAE one billion dollars date back to before Hafeez Sheikh was awarded the portfolio. The Fund was assured by Pakistan that "we have also reached agreements with our main bilateral partners to maintain their exposure throughout the programme period and are further working on modalities to ensure the new financing will be consistent with the programme debt sustainability objectives."
Subsequent to the approval of the IMF programme multilateral pledges, excluding the IMF, are 4 billion dollars: World Bank 1.3 billion dollars Asian Development Bank 1.6 billion dollars and Islamic Development Bank 1.1 billion dollars. And 6 billion dollars would be disbursed by the IMF during the programme period effective 1 July 2019 to September 2022. Thus total foreign loans available: 13.5 billion dollars plus 4 billion dollars plus 6 billion dollars equals 23.5 billion dollars. With total external funding need identified by the economic team at 38.6 billion dollars the total amount required from external sources during the programme duration is 15.1 billion dollars. This is doable as 6 to 7 billion dollars maybe incurred through incurring debt equity (sukuk/Eurobonds), and the remaining through enhanced exports (with a continued reduction in imports) and/or through increased remittances and the residual from additional loans from multilaterals.
The flaw that has emerged in the Fund programme design subsequent to the revelations of the extent of data mining after the publication of the consolidated budgetary operations is that the programme did not support a sufficient reduction in the budget deficit for the current year as it stipulated 7.2 percent of GDP in the current year - the same that the Pakistani team inaccurately claimed for last year. In other words, a massive recalibration is expected whose burden would fall squarely on the common man as and when the Fund begins renegotiating given the extent of data mining.
