Miftah in the middle

It was never going to be easy, but nobody could have foreseen that it would be this difficult for Miftah Ismael. The economy was headed towards imminent default when he took oath of office as Finance Minster on April 27, 2022. Reserves were dropping so fast that banks were forced to ration dollars to retire LCs, a process that intensified to near breaking point by July, the month that saw massive oil payments come due.

And now, at the final moment, only days away from Board approval of the much anticipated IMF agreement, the finance minister finds himself sandwiched between two fronts. One is his own party. At least two senior people – Abid Sher Ali and Hanif Abbassi – have lashed out at him publicly for the rising cost of living, especially fuel and power prices. Both of these gents invoked memories of Ishaq Dar, former finance minister of the PML(N), as a successful alternative and asked for the IMF program that is about to commence assuming Board approval goes through on Monday, to be renegotiated.

The second front is the PTI, which chose Friday as the day to launch a broadside attack on the IMF program. Provincial finance minister of KP, Taimur Jhagra, sent a letter to Miftah Ismael on Friday, the very day when the full impact of the floods ravaging his own province was coming into view, saying his province will no longer be in a position to run a budget surplus that he had committed to run back in July. Commitments of this sort were obtained from each of the four provinces as part of the IMF program, in which provincial surpluses are an important part of the fiscal framework.

It is hard to believe that the letter detailing the withdrawal of this intention had any purpose other than scuttling the IMF program. After all, only the night before, the PTI’s own spokesman Fawad Chaudhry was on the air saying his party intended to do precisely this. Speaking on Dunya news, he laid it out in so many words. First he told the anchor that the whole IMF deal “is based on the thing that both Punjab and KP will give the centre” a certain amount in the form of a provincial surplus at the ended of the fiscal year. He did not specify the amount, nor did he need to. When the anchor asked him whether his party intends to play this card, he squarely replied yes, we will. Then he went on to list the political demands they want in return for not playing this card. “They will have to hold elections, it will not work like this”.

The very next day a letter arrives, not from Punjab (which was the province being named in Fawad’s televised remarks) but from KP instead. How are we then expected to believe that there was any motive other than a political one when this card was played?

In his impassioned press conference given hours after receipt of the letter, Miftah pointed out the timing, and raised an impassioned plea against “this type of politics”, especially at a time when the country is reeling from the worst flooding it has seen in decades. “Do we want that the country should face default at this time?” he asked. “Do we want that the exchange rate should plummet, oil stocks to run out, the country should face a shutdown at a time when it is drowning in a catastrophic flood?”

The next day Jhagra offered up his own reasons for withdrawing himself from the central fiscal arrangement around which the IMF program is built. He listed once again his grievances, and primarily blamed his inability to even reach Miftah for a meeting, let alone sit down with him to negotiate the fiscal requirements of his province. But it is impossible to look past the fact that these grievances are years old, and pressing for a meeting with Miftah did not have to happen on the eve of the IMF board meeting. In short, its impossible to miss the timing of the letter, coming one day after the party spokesman tells his TV audience that they will do this to press their political demand for early elections, and two days before the IMF board meeting.

So Miftah now finds himself sandwiched between two sets of demands coming from two different directions. One from within his own party, to renegotiate the program with softer conditions, and another from the opposition, which wants to hold the program hostage to press its own demands for an early election.

The question naturally arises: which is of these is deadlier?

When considering this question it is worth bearing in mind that all these challenges facing the embattled finance minister are only the beginning. All this is happening just to come up to the start line. The real game will begin after Board approval (assuming it happens, which looks likely despite all the pushes and pulls). All the problems so far have grown from the uphill task of getting a Staff Level Agreement, so Pakistan’s case can be presented to the Board in the first place. Once approved program implementation begins in earnest, and things will get trickier from there on.

So far two former finance minister’s have tried to walk the tightrope that Miftah is about to walk. Shaukat Tarin in 2008 and Hafeez Shaikh, twice, in 2010 and again in 2019. Tarin did not last long, less than a year. Shaikh lasted longer in his first stint, primarily due to backing he enjoyed from the army. But in his second stint he barely lasted 15, entering office in December 2020 and exiting it in March 2021.

These are the only people who have actually walked the hot coals of a severe macroeconomic adjustment of the sort that Miftah is gearing up to walk on now. For some perspective, consider the size of the fiscal adjustment that has to be undertaken in the current fiscal year (graph 1). The reduction you see between FY19 and FY20 was Hafeez Shaikh undertaking the first IMF program that he signed in July 2019.

The primary balance (the key metric around which the health of the fiscal framework is assessed) was supposed to be reduced by 0.6 percent of GDP between FY19 and FY20 in that program. Next, look at the interest rates, that were hiked sharply to a near record of 13.25pc. Both these steps – sharply lower government spending, rising tax burden, and sharply higher debt servicing cost – brought the economy to a near standstill at that time. Those who remember those months will recall the cries of agony that rose up from the business community within weeks, and by October the top business elites and controllers of capital in the country showed up at the doorstep of General Bajwa, demanding relief.

Now consider the task Miftah. The primary balance has to not go shrink by nearly 3 whole percentage points in one year, an adjustment almost five times as big as the one that Shaikh was administering in 2019, which caused the outcry from the business community. And interest rates are already at 15pc, far above the level they were at back in 2019.

The adjustment facing the country today is far more strident, far more intense, than anything undertaken in the previous two decades. The only other time I can recall might be the Standby Arrangement completed by the Musharraf regime in 2000. And Miftah has to walk this line, with his own party member snapping at his heels, and an opposition eager to upset the applecart first chance they get. And to top it off, we now have the floods with their own fiscal requirements arising from the rehabilitation effort, and the economic damage that they have caused, including large scale destruction of the country’s crops, which is likely to fuel food inflation and drive import requirements for cotton.

This is not an enviable position to be in these days. How he finds his balance, maintains his poise, keeps his allies and adversaries on board while embarking on this awful journey, will clearly be the biggest challenge Miftah Ismael has faced in his life. If he doesn’t realize this yet, he will soon enough. Add this one more wrinkle: his term as finance minister ends on October 27, well before the next scheduled review of the facility. He can only serve for six months as an outsider. After that he either needs to be a Member of the National Assembly, or the Senate. Either way, his party will have to invest a certain quantum of its political capital to get him to continue in office. That is the first big decision point looming before him now.

The bet to place now is how long will Pakistan be able to walk the path outlined in this program. The floods have already changed everything. The politics that will shape up once the pain begins to bite in earnest, will add a new chorus of voices to those already being raised against the conditions agreed upon. The time when the government is forced to ask for relaxation of these conditions is not far now.