New Finance Minister Faces An Economic Minefield

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Pakistan has a new Finance Minister and there is buzz in the media and social media that things will change. However, since 2008, the country has had the following finance ministers: Hafeez Shaikh, Shaukat Tarin and Ishaq Dar, in addition to brief cameos by Asad Umar and Miftah Ismail. None of them has been able to resolve Pakistan’s basic economic challenges.

As Dawn columnist Khurram Hussain notes, Muhammad Aurangzeb has a lot going for him: “he is a well-respected financial sector professional,” “temperamentally sound and should be able to manage the stresses of the game he has just entered and “comes from a family that is no stranger to politics.”

However, Hussain warns “He will have very little time to settle in and will soon learn that he has a large role to play but a small script to work from. In his inaugural news conference, for example, he talked of digitalisation of revenue collection and bringing wholesalers, real estate and agriculture into the tax net. These are admirable goals, but Mr Aurangzeb will soon learn that there are some pressing issues demanding immediate attention. And once he gets on with these, the room for doing much more will constrict.”

While Hussain points out, “the next IMF review should be relatively smooth barring unforeseen developments” the problem will come with “talks for the successor programme, for which certain targets in budget of FY25 will most likely become a prior action. If all things go smoothly, we can reasonably expect a staff-level agreement in July, followed by board approval by August. But this depends on whether or not all things go smoothly.”

According to Hussain, “the new finance chief is about to walk into a minefield on at least two issues. First one is interest rates, and the second energy prices. Industry is up in arms over both, but that is not the big issue here. According to some calculations, a single percentage point hike in policy rate leads to a hike of Rs250 billion in debt-service payments for the government. Never mind what industry is saying about high interest rates for a moment. At 22pc, the current monetary policy settings are taking a wrecking ball to government finances, and pressure will mount on the new finance chief to try and persuade the IMF and the State Bank to start unwinding the tight policy stance.”

Next, “is the matter of debt restructuring, especially domestic debt. The amount the federal government pays in debt-service payments is now larger than the net federal revenues that define its resource envelope. This creates pressure to either renegotiate the National Finance Commission award to recover some of the resources devolved to the provinces since 2009, or to raise revenues through game-changing interventions of the sort he talked about in his maiden presser.”

After this, Hussain notes, “will be energy prices. Industry is reeling from a gas price hike of almost 300pc, though the exact amount depends on the type of industry and the use for which the gas is being purchased. In any event, industry is largely shutting down under the weight of rising energy prices and high interest rates. Private sector credit off-take, to take one example, has plummeted to dangerously low levels, implying steep cut-backs in working capital utilisation by industry. Investment had already plummeted, but the new numbers, along with conversations with a few in industry, suggest much of the industry is functioning at 50pc capacity at best.”

In conclusion, Hussain states, “the situation is going to aggravate further if macroeconomic settings remain unchanged. Aurangzeb will find that the stability brought about in the economy since last July has been procured at a very steep price. And the question that is likely to consume his bandwidth moving forward will be how much longer the country will continue paying this price.”

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Author: Syed Hussainy