So the Finance Minister, Asad Omar, has been sacked and for people criticizing this move, one fails to understand that what is all the fuss about? Here was a person who was not delivering: economy was in a free fall, both the stakeholders and the markets had lost confidence in him, and therefore it was only natural that he goes. Also, for the analyst propagating that his ouster should have been better handled (more softly perhaps), the thing is that termination is never a pleasant exercise and no matter how politely you draft it, there will always be some bad taste. In fact, if anything, the departure orders were somewhat belated by about 3 months, because in the corporate world the maximum initial/trial period generally kept is no more than 6 months. To me the real issue is: What next? While Mr. Hafeez Sheikh is a seasoned finance manager, the question is that does he have what it takes to craft policies that are in the long term interest of the Pakistani public or will he for the time being be just focusing on merely managing the economy’s cash flows regardless of the cost or repercussions of the type of borrowings he undertakes to achieve this? His track record as the privatization minister though leaves a bit to be desired; as some of the liquidations he managed during his tenure still remain questionable, to say the least! Implementing IMF policies in letter and spirit is always a tricky business, as on one hand we are made to believe that the intended measures are in our own long-term interest, while on the other hand it is obvious that the IMF is primarily a lending institution and it cannot take its eyes off the very necessity of ensuring that the borrower musters up enough revenues to return its money in the stipulated period. Little wonder that it is known as the lender of the ‘last’ resort and generally countries strive to graduate out of a Fund program rather than remaining in it - One of the feathers in the cap of the late Venezuelan President, Hugo Chavez (not very liked by the West though) was that he paid everything back to the IMF in 2017 in what the country owed to the Fund and declared a sort of economic independence for his nation after a wait of more than 30 years. Not liking the IMF is not an isolated phenomenon: Of late we have seen public in Jordan and Argentina take to streets to voice its opposition to IMF imposed economic policies that almost always place an abrupt burden on people rather than working on a gradual structural change that result in higher revenues over the long–run. And such a gradual transition needs to be in tandem with also trying to bring about a change in the very management culture of a flailing economy (I have talked about this in detail in my last book (Economic Management in Pakistan). Subsequently, policies in Argentina and Jordan had to be reviewed and modified keeping in mind the ground realities – Since, the Argentinian program appears to be running on course. One can only hope that Mr. Sheikh bears this in mind from day one, in his negotiations with the IMF, because given the existing wave of inflation in the country, to put any more burden on the common man may just backfire!

As a good omen, the markets initially reacted favorably to his appointment (PSA Index jumped nearly 700 points), but then, markets are known to be treacherous. If one does not give the investors what they are looking for, before one knows the trust erodes and the confidence slides. Budget is round the corner and Mr. Sheikh’s budgetary announcements will be the litmus test on how he wants to give the much needed confidence to the economy going forward: Will he choose to arbitrarily impose additional taxes (one hears Rupees 600 billion worth) on the existing tax payers or instead reform the revenue agencies to broaden the tax base and to lure potential taxpayers into the documented fold? Will he continue with the current witch hunting and scare tactics to further shake the confidence of businesses or restrain the government machinery from unnecessarily harassing the investors in order to rekindle economic activity in the country? Will he work on restoring industrial competitiveness and facilitating investment in manufacturing or will he opt to continue squeezing profitability out of the markets and further raise the lending rates? It remains to be seen.

For meaningful investment to happen and for businesses to flourish, ease of doing business is an index, which nearly all-aspiring countries these days take very seriously. Despite a lot of election time rhetoric, unfortunately the PTI’s government in its short tenure has not inspired any confidence in this sphere. Interest rate has climbed into double digits at 10.25%, meaning the effective borrowing rate for the SMEs being close 17%; no one-stop compliance windows established so far implying businesses still have to grapple with multiple governmental agencies that some count at more than 50 (including federal, provincial and municipal); and last but not least, still missing are any real reforms aimed at: a) distancing the tax payer from the tax collector; b) reducing excessive and often counter-productive governmental oversight on businesses; c) tangibly reducing bureaucratic red tape in routine operational matters, and d) rebalancing the skewed business laws that give unnecessarily wide powers to the regulator – in short, all talk and no real action so far to practically help in ease of doing business in Pakistan. In fact on the contrary doing business in Pakistan has become more difficult over the last 9 months: A massively devalued Rupee has compromised on the connectivity of the Pakistanis per say with the outside world – a natural side effect of any devaluation drive – leading to added capital pressures on any new plant investments for capacity addition, up-gradation for value addition or for balancing and modernization. The question that remains is: now that Mr. Omar is gone, will Mr. Sheikh will be seriously looking to address these issues when presenting the Budget 2019-20?

An underappreciated factor in long-term budget projections is how the projected interest rate (“R”) that the federal government pays on its debt and the projected growth rate of the economy (“G”) relate to one another.

In a nutshell, policymakers can more easily restore the nation’s fiscal health when the economic growth rate exceeds the average interest rate than vice versa. That’s because, when economic growth rates exceed Treasury interest rates, the burden of existing debt shrinks over time.  Or, putting it technically, policymakers can more easily achieve long-run debt sustainability when R minus G, or R-G, is negative than when it’s positive - sadly this is something that we are unlikely to see in the Pakistani economy, at least in the short run, which therefore makes the historical relationship between economic growth and interest rates even more crucial in our case.

Implying, the more we can keep interest rates down, the better it will be for our prospects on achieving equitable development and employment generation. Even if a broader reduction in interest is not possible over the next 12 months, it would be prudent if the government can announce special low cost/low interest-rate scheme for industrial investment, because if the industries do not balance and modernize, we will never be able to come out of the vicious cycle of producing low valued items in restricted product segments. As an average for almost all countries that have achieved strong growth and development numbers in the last half-century, they have done so by ensuring that GDP growth exceeds interest rates. For example, in China or in Vietnam or in South Korea on average over the last two decades, annual growth has exceeded interest rates by an average of 1.8, 2 & 0.9 percent respectively.

In a nutshell, if Mr. Asad Omar has been dispensed with then the move will only pay off if his policies are also dispensed with. Pakistani economy is too fragile to suddenly start losing out on its traditional economic winners, regardless of how controversial they may appear to be in their present state. For example, recently one heard a Punjab provincial minister explaining how his government is looking to shift investment away from the real estate sector. This, in order to block avenues for parking un-taxed money and to see to it that this money instead gets diverted to more productive sectors, because in his opinion real estate per se in Pakistan has become too expensive. The whole notion strikes as being rather odd, as everyone knows that not only a number of other sectors stand tagged to real estate development and if real estate goes down it also drags down with it the other accompanying sectors, but also that how come if a certain type of capital is unwanted in one sector it can suddenly be kosher or productive in another? And then again, who determines the right price point of a real estate in an economy: market forces or the government? The trouble is that given a recessionary trend both at home and in the international markets, this is not a time to experiment. The economic managers will do well to simply retain the ‘winners’ for now, whether these are in the shape of real estate or the stock exchange or beauty parlors or food retail outlets – the mantra for now should be to just somehow keep the economy ticking. Being an old hand, one is confident that Mr. Sheikh understands this well and knows that given the fragility of the Pakistani economy, needless tinkering with it is akin to tinkering with a loosely enjoined engine, which once dismantled can be near impossible to reconstruct!