Some factors due to ongoing fiscal and monetary policies have begun to impact on the quality of life and include: (i) rising utility rates, expected to be further raised in months to come attributed to poor sector performance; (ii) higher inflation due to an undervalued rupee (by about 7 percent in August) as well as higher taxes to meet an unrealistic revenue target of 5.5 trillion rupees; (iii) contracting private sector output leading to rising unemployment levels due to the 13.25 percent discount rate; and (iv) the perception that governance has been severely compromised due to flawed appointments and the National Accountability Bureau's (NAB's) investigations against bureaucrats and big industrialists.
Prime Minister Imran Khan continues to lay the entire blame for the current state of the economy at the doorstep of the previous two administrations - the Zardari-led government (2008-13) and the Nawaz Sharif administration (2013-18). One may not be remiss in assuming that the Prime Minister lays part of the blame for last year's appalling macroeconomic data on his first choice of Finance Minister, Asad Umar though he has publicly not made any statement to that effect.
The question is did Umar perform poorly during his eight months as the finance minister in comparison to Hafeez Sheikh's five and half months? There is speculation that Umar was sent packing as he was dragging his feet with respect to finalizing negotiations with the International Monetary Fund (IMF); this has been refuted by IMF staff who point out that the mission arrived in May 2019 to negotiate on a macroeconomic framework whose draft was submitted by Umar while he was in Washington DC to attend the IMF/World Bank meeting. Be that as it may, many respected independent economists were urging the government soon after it took over power on 18 August 2018 that an IMF package was the only way forward as it would generate other concessional assistance. To-date total multilateral assistance pledged for the current year, excluding the Fund, is around 4 billion dollars - peanuts compared to the 38.6 billion dollars external financing required for this year alone as stipulated by the new economic team and noted in the memorandum of economic and financial policies.
Those who advised the prime minister against going on a Fund programme last year were heeded less and less with the passage of time. Ironically, the pro-IMF programme economists are now stating that Pakistan's economic team did not negotiate well, specifically in terms of (i) sequencing which accounts for the burden on the people that may lead to socio-economic unrest unless some adjustments are made; and (ii) over-correction by the State Bank of Pakistan in terms of the exchange rate as well as discount rate which again may have negative political implications.
Did Hafeez Sheikh negotiate with the IMF on the draft submitted by Umar? There is considerable confusion here as Umar has publicly stated that the conditions agreed on 12 May with the new economic team - 24 days after he was dismissed - are less stringent because of the negotiations he held with the Fund compared to what was on offer by the Fund late last year; at the same time there are also credible reports that any attempt to negotiate on the politically untenable 'prior' and programme conditions/structural benchmarks, leave alone the over-correction by the SBP post staff level agreement, by the then secretary finance Dagha, led to his dismissal first from the negotiations and later from the Ministry.
Was Umar's successor recommended by domestic stakeholders dissatisfied with Asad's handling of the economy? Possibly; Umar has no economic background or relevant experience though he had headed Engro, a private sector multinational organization engaged in several fields including fertilizer and food. During his tenure (20 August to 18 April) Umar did not focus on reducing the budget deficit which his critics maintain accounts for 8.9 percent for 2018-19. However, some clarifications are in order: (i) in July-September 2017 the budget deficit was 1.2 percent, which rose to 1.4 percent during the comparable period of 2018; perhaps the containment was due to the caretakers; (ii) 2.2 percent deficit was witnessed July-December 2017-18 while during the first six months of 2018-19 the deficit was 2.7 percent; the differential between the two years is 0.5 percent; (iii) during the first nine months of 2017-18 the budget deficit was 4.3 percent while in the comparable period of Umar's tenure it rose to 5 percent; or a differential of 0.7 percent; and disturbingly (iv) during the entire year the budget deficit was 6.6 percent in 2017-18 - a period when the Shahid Khaqan Abbasi-led government was focused on the July 2018 elections and was being accused of over- spending. Last year, the deficit rose to 8.9 percent for the entire year - 2.3 percentage points higher than during the previous administration and a whopping 1.6 percent higher than during the first nine months. It is relevant to note that Hafeez Sheikh took over the portfolio on 20 April 2019 or only 20 days less than the last three months of 2018-19 when the budget deficit rose to such an unsustainably high level.
Senior members of the ruling Pakistan Tehrik-i-Insaaf (PTI) have not publicly said anything on the changing of the guard at the Ministry of Finance but in private conversations they lament Umar's dismissal who, they claim, was a long-term ideological member of the party and a more appropriate choice. Perhaps, but in this context one must acknowledge that Hafeez Sheikh has a history of following directives and in the budget he ensured an: (i) allocation of over 200 billion rupees for Prime Minister's signature Ehsaas programme and around 80 billion rupees more than last year for the Benazir Income Support Programme; (ii) defense allocation (including defense pensions) rose by around 7 percent; (iii) current expenditure (including foreign loan repayment) rose by 30 percent; and (iv) increased public sector development programme allocation by around 200 billion rupees.
One would have to wait till the end of the year to find out whether Sheikh slashes development expenditure (the usual practice by previous finance ministers inclusive of Sheikh's previous tenure as and when the deficit became unsustainable). In this context it is relevant to note that Ehsaas and BISP are embedded in current expenditure in the budget 2019-20 rather than under development expenditure outside PSDP as in previous years. This may allow Sheikh to slash these items in the event that the unrealistic revenue target is unmet (tax as well non-tax revenue) while claiming that he has slashed current expenditure without any political fallout though that logic is unlikely to go unchallenged by the one man he cannot ignore - Prime Minister Imran Khan.