No quick fixes and we're in for a painful period
Asad Umar’s removal as finance minister has triggered a debate on his performance while in office. Is he really the failure he is being described as, or was it too early to expect results from him?
Did he really fail to give direction to the economy as many claim or are his critics being lazy and ignoring the strategy he devised?
In order to evaluate him fairly, we should first have a picture of the economy he inherited. As with more or less every government over the last three decades, the current one also inherited a nearly bankrupt economy and had to start by seeking a foreign bailout. This time, however, the scale of the bailout needed was much larger than any in the past. The reason for this is an out-of-control trade deficit in recent years, which hit a record figure of $37.7b in 2017-18.
One major reason the trade deficit reached such huge proportions, other than low productivity and our competitiveness, was Ishaq Dar’s policy to keep the rupee artificially over-valued.
Let’s say the country is running a big deficit between its foreign exchange earnings and expenditures, and the natural exchange rate based on the supply and demand for dollars should be Rs140 per dollar but the central bank artificially keeps it down at Rs100 per dollar by dumping dollars from its forex reserves in the market. This effectively means giving anyone who imports something worth a dollar a generous subsidy of Rs40. On the flip side, for someone exporting an item worth $1, this means the government is taking away Rs40, which is essentially like a tax.
This makes the country’s products more expensive for foreign buyers, undermining their cost-competitiveness. With imports becoming cheaper than they should be, naturally, people are able to easily buy more imported products, and this creates an artificial feeling of relative economic stability and well-being even while the country runs unsustainable trade deficits.
But this can only last until the central bank runs out of its dollar reserves, at which point, it cannot artificially maintain the exchange rate any more. The joyride then ends, the local currency comes crashing down with a painful adjustment, economic growth drastically shrinks, and in more severe cases, the economy even contracts. Being in a crisis, the country then has to seek a foreign bailout.
This is the kind of situation that was building up in Pakistan under Ishaq Dar. Even Miftah Ismail realized this, and allowed the rupee to partially devalue during his year as finance minister. But being in an election year, he left the inevitable fuller devaluation and run to the IMF for the post-election period, thus allowing the crisis to worsen.
Overall, our imports rose from $45b in 2012-3 to $60.9b in 2017-8. Exports fell from about $24.5b to $23.2b in the same period. Even after adjusting for foreign remittances, this left a current account deficit of about $18b in 2017-8 alone. Consequently, the new government inherited a major crisis, in which it now had to take some difficult steps like allowing the currency to fully devalue and seeking a foreign bailout.
Asad Umar’s strategy
It is against this backdrop that Asad Umar gave his strategy to turn the economy around. The salient features can be summarized as follows:
We should debate whether this is a good plan for the economy. We can disagree with it and shred it to bits with logic if we find flaws in it. We should also debate how Asad Umar was doing on implementing these strategies, or at least the ones that were under his purview. But repeating the mantra that he never gave a plan is like asking whether Majnoo was a boy or a girl, after a whole night’s narration of the Laila Majnoo story. Unfortunately, a large section of our media suffers from the Laila Majnoo syndrome, and what stands out most strongly about the majority of criticism directed at Asad Umar is the almost total absence of any specifics on what he was doing wrong or what should be done instead.
There is criticism from some quarters that Asad Umar created too much uncertainty by delaying the IMF. Yes, he didn’t immediately go to the IMF. There were two reasons behind this: (a) our overall populist narrative on the IMF to which the PTI itself has irresponsibly contributed over the years; and (b), the very genuine concern that the IMF will demand measures that will depress growth and result in more hardship for people.
So the idea was to get some funding from elsewhere first and then approach the IMF in a stronger bargaining position in order to secure better terms. Now, there is definitely room for legitimate difference of opinion on whether this was a better choice than going for an IMF bailout immediately, but it cannot be called a lack of policy. Also, it’s hard to imagine that this was Asad Umar’s decision alone and not that of Imran Khan himself. It is also clear that many of the people bashing Asad Umar for the whole crisis and baying for his blood would have been doing the same had he gone to the IMF immediately. Then they would have been blaming him for the harsh austerity measures demanded by the IMF.
In any case, the claim that the IMF delay seriously hurt investment sentiment by creating too much uncertainty is very hard to justify considering that the delay was only for a few months, and by and large, it was clear that they are going to the IMF. Those making this assertion do not offer any plausible argument or evidence to show that many investors were holding off on their plans for business expansion or new ventures just because the government delayed the IMF. Also, it is not as if the government was doing nothing in this period; it did secure funds from Saudi Arabia, China and the UAE while it was taking longer with the IMF. In the larger scheme of things, the real issue is whether the government is able to carry out some of the badly needed reforms to put the economy on a sustainable growth trajectory, and not engage in some pointless nitpicking over an insignificant delay in rushing to the IMF.
From the point of view of achieving sustainable growth, Asad Umar’s announced strategy, which was summarized above, is fairly reasonable, though there are also some aspects that can be legitimately questioned. What we need is a shift from an economy running on unsustainable consumption fueled by an overvalued currency to one centered on investment. The devaluation of the currency, the cuts in indirect taxes on businesses in the mini-budget announced in January, and the promise of providing energy at competitive rates to industry, are steps in the right direction to this end. These measures represent a bold attempt to make a departure from the usual script that focuses on austerity and indirect taxes in order to make up for the state’s inability to collect direct taxes. The success or failure of this strategy will, however, ultimately depend on whether the government succeeds in improving direct tax collection and reducing unproductive spending in areas such as defense or the losses of state-owned enterprises. And there is absolutely no case for making Asad Umar the punching bag or fall guy based on any of these items, and that too so soon.
There is, of course, room for legitimate debate and criticism on the Sarmaya fund and whether that is a better option than privatization. My opinion is that if the PTI government has decided to have a go at reviving them within the public sector, then it is welcome to give it a try. But then, it should clearly announce that if these corporations do not show improvement according to some clear benchmarks by a certain deadline, then they are being privatized. That said, privatization itself has been a tough nut to crack, and will inevitably come laden with controversy and layoffs. In either case, it is again hard to imagine that the decision not to pursue privatization is Asad Umar’s personal decision alone, and not that of Imran Khan. There are also some valid criticisms concerning the way this government has gone back and forth on whether tax non-filers can purchase real estate and large cars, or the announcement of the recent amnesty scheme. But again, these are not on Asad Umar alone, and in either case, are not significant enough to warrant his removal.
What about the performance of the economy under his watch? To be honest, eight months is too soon for us to expect a quick turnaround. So naturally, the results are somewhat mixed at this point. For example, imports have decreased due to currency devaluation, but exports have not responded yet. Whether this is because of a time lag or due to some other issues, is again too soon to tell. Besides, the more fundamental structural problems of our industry cannot be fixed instantly.
There are some reports of improved optimism and new investments coming up in the textile sector. But again, whether it represents a temporary phase or the start of something more solid and long-term, is premature. The FBR is having some difficulty meeting its tax targets. The government has explained this in terms of the decrease in imports, leading to a fall in taxes associated with imported products, and the cut in tax on items like oil in order to partially offset the effect of rupee devaluation. Whether this adequately accounts for the failure to meet targets, and whether the measures to reform the FBR and improve tax collection eventually work, is again, too early to tell. In any case, Asad Umar was not in charge of the FBR, so ultimately its performance cannot be laid at his door.
Overall, the results thus far are certainly not a complete failure as partisan critics would have us believe. Those who have been portraying Asad Umar as an unmitigated disaster have done the country no favours, whether they are motivated by vested interests, political point-scoring or some other bias against the PTI, media ratings, or the desire for immediate results. They have offered no set of intelligent benchmarks against which he was supposedly failing and the next finance minister is expected to deliver within a few months.
There is no quick fix, and no matter who is in charge, we are in for a painful period for at least the next two to three years. Then, if the government is able to address some of the structural problems, might we start seeing a revival of the economy in a way that is sustainable, and does not end in another crisis in the next government’s lap like Dar’s window-dressed economy. Whether they achieve this or not, is the ultimate yardstick for the success or failure of this government on the economy. The yardstick cannot be whether they deliver some instant magic.
The writer has a PhD in particle physics from Harvard University. @AqilSajjad