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Wednesday, March 22, 2023

NOT SO GLAMOROUS: Abdul Hafeez Sheikh and the weight of history

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Dr Omer Javed |

Dr Abdul Hafeez Sheikh has been appointed as the new Advisor for Finance. Previously, he served as finance minister for three years from March 2010 till February 2013. He arrives at a time when negotiations with the International Monetary Fund (IMF) for a new programme are entering its final stage.

At the same time, the performance of macroeconomy and economy growth during his last stint also raises big questions. In this regard, the burden of economic history is quite heavy, and hopefully, the Prime Minister Imran Khan will not be let down in his choice; albeit a risky one to say the least.

This economic performance need not be repeated by the new advisor for finance since the future of both the country and the Pakistan Tehreek-e-Insaf depends on it.

With Hafeez Sheikh as finance minister, Pakistan approached the IMF in December 2010 with the request- which was granted by the IMF- to extend the duration of Standby Arrangement (SBA) programme, which was earlier negotiated in late 2008, so that the country could implement the remaining policies under the fifth and sixth programme review.

Yet those could not be completed and the SBA programme was terminated inconclusively by the IMF in September 2011. Later on, in November 2012, at the time of completion of the First Post-Programme Monitoring discussion with the IMF, and 33 months into the tenure of the finance minister, the IMF highlighted the less-than-satisfactory position of the economy in these words, “Pakistan’s economy faces many challenges.

Read more: Where is the discussion on policy?

Deep-seated structural problems and weak macroeconomic policies have continued to sap the economy’s vigor. Real GDP growth over the past four years has averaged only about three percent annually, and is projected to be about three and a quarter percent in 2012-2013, insufficient to achieve significant improvement in living standards and to absorb the rising labor force.”

Looking back, the above could be amply substantiated by the economic analysis from the time of Dr Sheikh as finance minister.

Table 1: Lack of negative correlation between the policy rate and inflation

Sr. No. Months Policy Rate (%) CPI Inflation (%)
1 Mar-10 12.50 12.9
2 Apr-10 12.50 13.3
3 May-10 12.50 13.1
4 Jun-10 12.50 12.7
5 Jul-10 12.50 12.3
6 Aug-10 13.00 13.2
7 Sep-10 13.50 15.7
8 Oct-10 13.50 15.3
9 Nov-10 14.00 15.5
10 Dec-10 14.00 15.5
11 Jan-11 14.00 13.9
12 Feb-11 14.00 12.8
13 Mar-11 14.00 13.0
14 Apr-11 14.00 12.5
15 May-11 14.00 12.6
16 Jun-11 14.00 13.3
17 Jul-11 13.50 12.4
18 Aug-11 13.50 11.6
19 Sep-11 13.50 10.5
20 Oct-11 12.00 11.0
21 Nov-11 12.00 10.2
22 Dec-11 12.00 9.7
23 Jan-12 12.00 10.1
24 Feb-12 12.00 11.0
25 Mar-12 12.00 10.8
26 Apr-12 12.00 11.3
27 May-12 12.00 12.3
28 Jun-12 12.00 11.3
29 Jul-12 12.00 9.6
30 Aug-12 10.50 9.1
31 Sep-12 10.50 8.8
32 Oct-12 10.00 7.7
33 Nov-12 10.00 6.9
34 Dec-12 9.50 7.9
35 Jan-13 9.50 8.1
36 Feb-13 9.50 7.4
Average (36 months) 12.35 11.54

It can been seen that even when Ministry of Finance and State Bank of Pakistan (SBP) persisted in a prolonged way, as evidenced by the three boxes in the table above, whereby even though it could be seen that tight monitory policy was quite insignificant in denting CPI (consumer price index) inflation (or simply inflation) in the preceding months, the same policy was repeated for 10 months during which the policy rate was kept at a high level of 12 percent. Hence, even with keeping high levels of policy rate, inflation remained quite stubborn.

Read more: Textile sector of Pakistan

Furthermore, during the 36-month tenure of Dr Sheikh as finance minister, while the policy rate stood at a high of 12.35 percent on average, the average inflation stood at 11.54 percent. This policy failure took a toll on economic growth, employment, and other macroeconomic indicators, whereby the country remained under the situation of stagflation – high inflation, high unemployment, and low growth. Here, the two floods of 2010 and 2011 only chipped off a slight portion from economic growth, while the rest was quite evidently a result of lack of correct policy choices being adopted.

Table 2: Stagflation- high inflation and unemployment, and low growth

Fiscal Year (FY) Real GDP growth (%) Fiscal Deficit (% of GDP) Exports (US$; billion) Unemployment Rate (%) CPI Inflation (%)
2010/11 2.4 6.6 25.4 6.0 13.9
2011/12 4.4 8.5 24.6 11.0
2012/13 3.6 8.0 24.8 6.2 7.4
Average 3.5 7.7 24.9 10.8

The above table indicates that even when the long phase of tight monetary policy was adopted inflation could not be dented in any sustainable way, while fiscal deficit also averaged at a high level of 7.7 percent of the GDP (gross domestic product, or simply national income) during FY 2010-2013.

Read more: Naya Pakistan’s mixed economic policy signals? – Dr. Omer Javed

This policy persistence took a heavy toll on both economic growth which remained at a paltry level of 3.5 percent during the three fiscal years on average, and even lower than the one projected for this fiscal year at 2.4 percent – and the unemployment rate, which actually increased from the already high level of six percent to 6.2 percent. At the same time, exports continued to hover around the $25 billion mark during the three fiscal years.

This economic performance need not be repeated by the new advisor for finance since the future of both the country and the Pakistan Tehreek-e-Insaf depends on it.

Dr. Omer Javed holds Ph.D. in Economics from the University of Barcelona, Spain. A former economist at International Monetary Fund, he is the author of Springer published book (2016), ‘The economic impact of International Monetary Fund programmes: institutional quality, macroeconomic stabilization, and economic growth’. He tweets at @omerjaved7. The views expressed in this article are author’s own and do not necessarily reflect the editorial policy of Global Village Space.