‘It’s the economy, stupid’

[LRE]

Arif Nizami

Finally, Dr Abdul Hafeez Sheikh, a dark horse, has accepted the coveted job of adviser to the prime minister on finance, revenue and economic affairs. Better late than never, Pakistan finally has a finance minister. After the initial flurry to find Mr Shaukat Tarin’s successor there seemed little sense of urgency to fill the most important position in the cabinet second only to the prime minister.

The original contenders for the job included Dr Hafiz Pasha who briefly served as the adviser on finance when Mian Nawaz Sharif was the prime minister, only to be replaced by his close friend, Ishaq Dar. Although he is a respected banker, the sole claim to fame of another contender, Mr Nasim Beg, rested on the fact that he is a close relative of Mr Anwer Majid, a trusted friend of the president. There was speculation in the financial circles that precisely for this reason the prime minister was not in his favour. However, it confounds logic that if Mr Beg was really the president’s man, how the prime minister could effectively block him.

Dr Hafeez Sheikh, a US-trained economist, who served in the World Bank as its country head in Saudi Arabia, is not new to Pakistan. Belonging to a landed family of Sindh closely related to the Soomros, he served as the provincial finance minister and later as the minister for privatisation and investment in the Musharraf regime. Despite showing good results in both the slots, he resigned from his post over policy differences. Since then he has been heading an investment firm based in Dubai.

According to the outgoing finance minister, Mr Shaukat Tarin, in the board meeting of the IMF which takes place on March 24, the fifth tranche of $1.2 billion of the 11.3 billion IMF bailout package for Pakistan is to be assured. It is obvious that the government wanted Dr Sheikh in place before the crucial IMF meeting. However, the question that begs an answer is that why the inordinate delay in finding Mr Tarin’s replacement when he had conveyed much earlier to his bosses his decision to quit to look after his own bank.

Admittedly, Mr Tarin ably steered the economy in very turbulent times. Despite the country being virtually in a state of war, riddled with suicide attacks, he managed the economy well, bringing a modicum of economic stability. This was no easy task especially when governance issues coupled with tales of corruption and cronyism have plagued the PPP government.

Mr Tarin openly defied his political bosses on the contentious and economically indefensible issue of rental power projects. He offered to resign in a heated cabinet meeting and only backed off when the prime minister agreed to an audit of the RPPs by the Asian Development Bank. The finance minister was vindicated when the ADB upheld the view that excess power capacity and the related issue of circular debt be tackled before embarking on the dubious and economically prohibitive RPPs’ scheme.

The former finance minister can also take due credit for bringing inflation down from 20 per cent to 9 per cent in two years. However, according to latest figures it is up again into double digits. Another big plus for Mr Tarin was the broad consensus reached amongst the provinces on the National Finance Commission (NFC) Award that happened on his watch. President Zardari rightly called the seventh NFC Award a historic achievement at the signing ceremony of the award at the presidency.

A modicum of stability notwithstanding, handling of the economy remains the bête noire of the present government. As it is, resource crunch coupled with structural distortions is a perennial problem that successive governments have been facing. But this is no excuse for the bulk of the population living below the bare sustenance level, facing endemic shortages of basic foodstuffs at prices increasingly beyond their reach. The manufacturing sector on the other hand justifiably complains about difficulty in uninterrupted supply power and fuel on competitive prices.

State corporations like the national airline, WAPDA, railways and the Steel Mills – packed with cronies and political appointees by successive governments – are massively contributing to the burgeoning budget deficit. A projected GDP growth rate of just over three per cent during the current financial year is barely sufficient to keep pace with the rate of population growth.

In sharp contrast, the Indian economy is growing at the rate of eight per cent. Spending the bulk of its resources on defence and debt servicing, Pakistan is finding it increasingly difficult to match the defence capabilities of its hostile neighbour. In these circumstances, it is not difficult to imagine that after filling the coffers of its ruling elite what little can the state spare for vital sectors like health, education and housing.

The banking sector has shown robust growth in recent years. However, the recent spate over the acquisition of Royal Bank of Scotland Pakistan by MCB is a setback. Strangely enough, the State Bank after giving approval to MCB to conduct due diligence of RBS Pakistan last year, did not let the deal go through on the plea that the MCB’s sponsor shareholders did not meet the Bank’s regulations. In the Sindh High Court the shareholders have taken the plea that since the privatisation agreement between the government and the sponsor shareholders predates the SBP circular, it cannot be applied with retrospective effect. Hence in essence the sponsors refused to deposit their share post facto and as a result RBS is looking for a new buyer. It is clear that the State Bank linked the acquisition of the RBS Pakistan by MCB to a circular issued much earlier. If the MCB did not qualify, the permission for due diligence should not have been accorded.

Adding insult to injury is the Banking Companies Amendment Bill recently passed by the National Assembly. According to the interpretation of some bankers, the amended law gives draconian powers to the State Bank by suspending the role of the Security and Exchange Commission and hence is liable to be misused. Circles close to the State Bank, however, defend the amended law on the ground that banking is no ordinary business since overwhelming part of its funds are public money. Hence, being a custodian of public money, a banking company cannot be allowed to go under just because of the malfeasance of its shareholders. The entire emphasis of the proposed amendments is to regulate the shareholders of the banking company instead of a banking company itself, they contend. Furthermore, laws similar to the proposed amendment bill already exist in many countries.

In this backdrop, it is important to address the genuine concerns of the bankers. Whatever law, if needed, should be transparent in its application obviating the possibility of being misused for mala fide intentions by the government, present or future. The bill should not only be referred to the Finance Committee of the Senate, but also the views of the stakeholders be sought before its being passed.

No one should envy the mild-mannered and self-effacing technocrat adviser on finance. Judging by the country’s dire economic straits his job is a daunting one. The IFIs and donor countries, primarily the US, will be relieved that here is a person they can do business with. Being no walkover, Dr Sheikh will hopefully be able to ward off competing vested interests vying for influence on the basis of cronyism and political connections. Hopefully, he will be given the authority and the freehand he demanded before joining the cabinet.

In the end analysis, it is the economic performance of the government that will be the make-or-break issue even before the next elections. To borrow from history, H.W Bush senior won the Iraq war in 1991 and had a job approval rating of 90 per cent. The very next year his job rating started to decline and he lost the presidency to Bill Clinton because of his poor economic policies. During the election campaign, Clinton, taunting his rival coined the now famous phrase “It’s the economy, stupid.”

The writer is a former newspaper editor. Email: arifn51@hotmail.com