Diverging paths – Journal – DAWN.COM
Last week I wrote that there appears to be a brawl within government at the highest level over the future direction the country’s economic policy will take. The Prime Minister appears tired of the austerity imposed under the IMF program and, under pressure from lawmakers in his own party, is seeking to relax the constraints of the program and spend a little more than he has been allowed until now. However, another actor, whose identity is not known but who also seems to be pulling the blows within the government, seems to want to stick to the commitments made to the IMF.
I said that the way things are going as this brawl continues will become clearer when three questions are answered. First, who will be Pakistan’s next finance minister? The lingering rumor that Hammad Azhar is set to be replaced by Shaukat Tarin has only been reinforced since last week. He was waiting for NAB’s appeal against his acquittal in the rental power case to be decided, but the High Court in Islamabad threw a wrench into that wait by refusing to hear the case in an expedited time as NAB l ‘asked in his plea. But on Tuesday, he visited the FBR and, according to press reports, stayed there for a few hours to get a detailed briefing from senior tax officials. Whether or not he will come remains an open question, but it seems increasingly likely based on continued press comments.
Second, we needed to see the staff report for the program that had been negotiated and accepted by Hafeez Sheikh just days before his unceremonious departure. That report has now been uploaded – and not only that, the government’s budget strategy paper has also been unveiled. The rating report shows us the commitments the government has made to the Fund. The strategy document shows us what it plans to do in the next budget. And there are significant differences between the two. These tell an important story.
Third, we had to see what the real intentions of the new Minister of Finance – the one who effectively replaces Hafeez Sheikh – really are. Hammad appears to have made some of it known after a conversation with the IMF managing director on Monday, following which she tweeted that “the way forward for vital economic reforms” has been discussed as well as the “necessary external financing” by the country to meet its challenges in the months to come. It looks like they’re not just asking for more flexibility in goals, but additional support as well.
The strategy paper shows a significant deviation from the commitments made to the IMF by Hafeez Sheikh.
Some clues as to the type of easing they seek are provided by comparing the targets in the Fiscal Strategy Paper with those committed to the IMF a few weeks ago. Let’s start at the top and compare these numbers. The Fund predicts that the growth rate of the economy will be 4% next year, while the strategy paper forecasts 4.2%, so already a gap will open in all other figures, as the number of titles was increased slightly. Keep in mind that the total GDP projected to be around 52 billion rupees, a difference of 0.2 pc means well over 100 billion rupees.
After that, the Fund sees the budget deficit at 5.5% next year, while the government says 6% in the strategy paper, a gap of over 260 billion rupees. Even to meet that 6% target, provinces will need to more than double their surpluses next year, where they have struggled to meet even budgeted surpluses in the past. It’s a safe bet that even that high 6pc target will prove difficult. The Fund predicts that the primary balance will be in surplus of Rs143 next year, while the strategy paper predicts that it will be in deficit of Rs49bn instead, meaning a gap of Rs192bn.
Going forward, the government aims to collect total revenues of around Rs 8 trillion next year, according to the strategy paper, but to the Fund they have committed Rs 8.8 billion, a gap of Rs 800 billion. of rupees. They plan to spend 800 billion rupees as part of the federal development budget, while the Fund has pledged that this amount will be 627 billion rupees, a difference of 173 billion rupees.
Thus, some elements of the “new direction” already seem to appear: higher spending and lower taxes. As a result, deficits will be high, borrowing costs will be Rs 45 billion higher and public debt will be one percentage point of GDP higher than what was promised to the Fund.
These high expenses and this reduction in the tax burden will be partly financed by the loan. But another important discrepancy could give the brawl over the finance ministry a lot of meaning. The Fund has been informed by Hafeez Sheikh that defense spending next year will be Rs1,444tr, which is 12.5% more than the projected total for the current year. But in the strategy document, defense spending is given as Rs1.33tr, lower by Rs114bn compared to commitments, and representing a meager increase of 3.6pc compared to this year.
Strategy paper shows significant deviation from IMF commitments made by Hafeez Sheikh, with government aiming to free up more space by easing its budget deficit and debt reduction targets, as well as reallocating spending of the defense. towards development.
It seems Imran Khan is feeling the pain of the adjustment he had to make – with a short hiatus between last April and now – and wants to spend money to shore up the weakened and besieged electoral outlook. legislators from his party. He is under increasing pressure within his party to do more to alleviate the suffering of people due to high unemployment, high inflation and stagnant (or falling) wages. But resources are limited and the constraints on its ability to spend are strong. This is what is behind the fight in the place of the Minister of Finance. The numbers give an idea of who is fighting for what.
The writer is a business and economics journalist.
Posted in Dawn on April 15, 2021