Where the camel sits By Khurram Husain

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A RISING tide of uncertainty is flowing in. Shaukat Tarin said as much in his visit to Karachi last week, where he met with the leadership of the Pakistan Stock Exchange, as well as the two largest chambers of commerce in the city. At the apex chamber – the FPCCI – he was peppered with requests for all manner of tax breaks and relaxations from the representatives of the business community. After listening carefully to them all he started by reminding that the country is in an IMF programme, that fiscal space is tight and the situation emerging from the fall of Kabul to the Taliban is rife with uncertainty. “We don’t know where the camel will sit” he said, a veiled and subtle reference to the uncertainty arising from the new regional situation that has opened up with the implosion of Ghani’s government in Kabul and how the rout by the Taliban might impact Pakistan’s relations with the United States.

This was the only reference he made to the uncertainty that the country is flying into. It was also the only time during that interaction when his voice carried a note of grave seriousness. The rest of the conversation was a routine affair, with promises of setting up a help desk at the FPCCI, and listening to complaints about this or that tax and especially the way NAB interference was hampering business confidence.

Matters of grave importance are not hammered in, nor are they discussed frivolously or dilated too much upon before open audiences. Everybody in the room knew what he was talking about. The country is preparing to reenter the IMF programme that has been in limbo since March, when Pakistan signed onto an adjustment programme and within weeks, after receiving the tranche of half a billion dollars against the commitments, reneged and announced that they wish to renegotiate the terms of the agreement. That was how Tarin was brought in, after his predecessor was abruptly and unceremoniously shown the exit.

Read: The return of Shaukat Tarin

Since then it has been Tarin’s job to feed two ferocious appetites simultaneously: the powerful military establishment and the political government in Islamabad. Last fiscal year the defence services secured Rs31.9 billion via supplementary grants on the revenue account, in addition to another allocation for Covid-related expenses. Back then they had also programmed defence spending to rise to Rs1.44 trillion in FY2021, an increase of more than 12 per cent from the allocation in FY2020. Instead they got Rs1.37tr, an increase of 5.4pc. It is likely that just like last year, there will be demands through supplementary grants this year as well seeking further extra budgetary allocations for employee-related as well as operational expenses.

Meanwhile the government is keen to gun the engines of growth and launch one of the most massive redistributive programmes called the Kamyab Pakistan Programme this year. Around Rs25bn have been allocated to the KPP in this year’s budget, but Imran Khan wants this to rise to Rs1.6tr over the next two years. Many of the resource requirements for this programme have surfaced after the announcement of the budget, and reportedly that is one of the reasons why Special Advisor to the Prime Minister on Revenue, Dr Waqar Masood, developed differences with Tarin and gave his resignation.

So Tarin has a high-wire act to perform, balancing the resource requirements emanating from both sides, while finding his way back onto the IMF programme. Along the way the fall of Kabul to the Taliban has complicated the picture further for him, because it is not yet clear how developments there will impact Pakistan’s relations with western capitals, particularly Washington DC. These capitals, especially Washington DC, have a very large voice on the IMF board and our history shows that fund programmes run into difficulties whenever these relations are frayed.

For the moment some relief has come to the government in the form of $2.8bn from the IMF through the increased allocation for all countries. This buys him some badly needed time. But it would be damaging for him if the forthcoming review with the Fund, that is scheduled to begin in a few weeks, were to again remain inconclusive. That would be a signal to Pakistan’s creditors that things are not going well, and given the growing reliance on short-term debt to secure government financing and shore up the reserves, could signal trouble for the exchange rate.

But beyond the short term, Tarin has to watch out for the inherent contradiction in the government’s plans. Gunning growth through public expenditure inevitably gives rise to external sector imbalances in Pakistan. The reason is simple. A growing economy requires more imports as raw materials, while exports fail to keep pace. The net result is the country ends up financing its trade deficit through remittances, or short-term borrowing. This time they are counting on remittances to grow by around 10pc from last year’s high of $28bn, but every month they fail to see this 10pc growth means the subsequent months have to show an even larger growth to keep pace and meet expectations. If remittances fail to grow at the projected rate, it will spell serious trouble for the stability of the macroeconomic framework, and the government’s drive to pump growth.

It seems the purpose of Tarin’s visit to Karachi was to impress this reality upon the business leaders of this city. Do not ask for any further relief on taxes, he seemed to be saying. If anger in western capitals grows, especially if the evacuation effort falters and President Biden has to face intense criticism from Congress over his failure to evacuate all those who had commitments to be airlifted to safety, it is entirely possible this will be passed on to Pakistan. The air is thick with uncertainty these days, the commitments of the Pakistani government are heavy, and nobody knows where this camel will sit.