Chief of Army Staff Bajwa reportedly informed the country's richest 30 or so businessmen, (including those who are being investigated by National Accountability Bureau and who naturally felt passionately about taking away its powers to investigate them) during their dinner at GHQ on Wednesday that the government is not going to change and to continue to engage with it. The business community acknowledged that Prime Minister Khan engages routinely with them, much more than his predecessors, and that they will continue their engagement. The discussion with the Prime Minister the following day was along similar lines.
And yet there is a visible disconnect between what the businessmen said during and after the meeting with the CoAS and the Prime Minister and the business decisions they are taking. And macroeconomic data clearly and unambiguously reveals that private sector output is declining. Dr Hafeez Sheikh-led Finance Ministry disagrees and issued a statement on Saturday claiming that "the contention of a section of media talking about shrinking economy is not correct as the early signs of recovery of economic activities in fiscal year 2020 are very much encouraging." As proof, the statement referred to the cotton output target envisaging an increase of 3 million bales this year (a contention that revealed that the drafters were inanely unaware of Cotton Crop Assessment Committee report of a 33 percent decline from the target) which renders the subsequent argument that this would imply a rise in textile output (with 20 percent weightage in large scale manufacturing - LSM) false. The Finance Ministry statement is vintage Hafeez Sheikh as during his previous tenures too he dismissed all criticism of his flawed policies as being partisan and on occasion doctored data to prove his point.
Shabbar Zaidi was appointed by the Prime Minister as Chairman Federal Board of Revenue (FBR) on 9 May 2019. His terms of reference did not include negotiations with the IMF specifically with respect to determining the unrealistic 5.5 trillion rupee target for the current year (though he reportedly did attend a session when the Fund mission was briefed on FBR). Be that as it may, Shabbar has been proactively engaged in reforming the Board and it is generally believed that his previous avatar as a chartered accountant for big business houses (which normally do not evade taxes though they may legitimately engage in tax avoidance) enables him to plug all loopholes and bring all into the tax net.
What is noteworthy is that a mere five months after Hafeez Sheikh was selected as the Advisor to the Prime Minister on Finance (20 April 2019) and Reza Baqir was appointed as Governor of the State Bank of Pakistan (6 May 2019) the business community's business decisions reflect visible concerns with fiscal and monetary policies, traders have refused to give way on the issue of use of national identity cards, and the general public is struggling with rising inflationary pressures while these two signatories to the 6 billion dollar International Monetary Fund (IMF) programme maintaining the economy is moving in the right direction.
Four factors indicate that the country maybe moving towards a winter of discontent with the economic team leaders. First continued decline in LSM due to an undervalued rupee (to the tune of 7 percent), a prohibitively high discount rate of 13.25 percent (around 4.75 percent higher than core inflation), and an attempt to enhance documentation by the FBR to include all non-filers at one go, which maybe supported from an economic perspective but is the reason behind cessation of economic activity in that particular sector/subsector. An example is the real estate sector where activity has all but ceased which, in turn, is negatively impacting on all of 30 plus associated industries, including cement.
Second, FBR, is struggling under Chairman Shabbar Zaidi to minimize the shortfall, estimated at 110 billion rupees for the first quarter of the current year, due to around 15 percent lower revenue collection under the head of import duties - a decline specifically due to the undervalued rupee inexplicably defended by Baqir; or in other words there is a widening disconnect between the policy decision of one member of the economic team and the target set for another. In addition, the objective of enhancing documentation is contributing to a decline in output with the result that FBR is eroding its own revenue base.
Thirdly, small and medium enterprises have cut down staff as their clients are declining in number attributed to rising inflationary pressures (with pay raise in the current year for government employees only, barring senior civilian and military officers who have voluntarily taken a pay cut). And finally, those employed in the private and farm sectors are struggling to make ends meet as food/transport/energy costs continue to rise.
Disturbingly, the IMF structural benchmark to notify the 2020 electricity tariff schedule determined by Nepra by end September 2019 was met only after a telephone call was purportedly made to Nepra Chairman by a "very high official" with the plea that the determination must be made before the deadline in the "national interest" defined as meeting the IMF condition. This was publicly acknowledged by Nepra Chairman.
To make matters even more disturbing the PTI government has only an 8-seat majority in the National Assembly (with coalition support) while the opposition is in majority in the Senate - a condition that has stalled the passage of critical legislation including that relating to the commitments made by the government to the Financial Action Task Force (FATF) as well as the IMF. Be that as it may, to date the two major Opposition parties have not made any serious attempt to spearhead the rising public discontent though statements by both PPP and PML-N leadership on ongoing flawed economic policies and their impact on the people are frequent. Instead, they appear to be waiting for spontaneous public outbursts and/or for fissures to appear in the civil-military ties to lead to an in-house change or fresh elections, a not unusual practice in the past.
To conclude, there is a need for the government to revisit the over correction or front loading of the implementation of reforms agreed with the Fund in terms of monetary, fiscal and financial policies and seek to establish a working relationship with the opposition at least till such a time as the economy begins to turn around as perceived by the general public and not just the team leaders.