News flash: we are broke

Nothing wakes people up like a good ol’ economic crisis. Every so often the cycle repeats itself. Pakistanis become hypnotised by the political theatre that never ends in this country. Meanwhile foreign inflows stop and the government quietly hikes up borrowing from its own banks, or printing money to make it through the day. Reserves begin to drop, revenue targets are blown, tariffs of essential goods like electricity and petroleum products are the first to be hiked.

All along, a familiar tango plays out between the government and its creditors. Government representatives try and inject a note of urgency into their discussions with foreign creditors, but are constrained to speak in hushed tones lest their dire predicament be overheard by capital markets abroad, domestic bankers (who are rarely fooled), and all other category of economic stakeholders. Publicly the finance team puts on a brave face, telling the country that everything is alright, even as private warnings border on hysteria. The finance team sends urgent messages to their political leadership, albeit discreetly, urging austerity, and asking for political support on unpleasant measures. And the political leadership spurns these messages, citing political difficulties and survival of the government. Eventually a full court briefing is summoned where the finance minister tells the cabinet there is no longer a choice.

Consider the end of the second Nawaz Sharif government. The IMF’s demands then, as now, were brutally simple: unwind your entanglement with Hubco, impose the GST, restructure your Eurobonds before asking bilateral creditors for a restructuring, withdraw power and fuel subsidies to bring the fiscal deficit under control. Remember the multiple visits by the IMF team, preceded by announcements from the finance ministry that this time the team will approve the release of the next tranche, only to be disappointed?

The tango didn’t change with Shaukat Aziz. Things weren’t going well for him until 9/11 came along and bailed him out so big we’re all paying for it to this day. Remember the merciless budget-cutting of 2000? And still the poor finance minister found himself before the full court, only this time the horses wore uniforms. Remember how he had to explain to the assembled corps commanders that Pakistan could not afford hostilities any longer, that our reserves position is too precarious for any sort of adventurism?

And Shaukat Tarin was invited onto the floor when our reserves had dwindled to dangerous levels. Remember options A, B and C? Remember “over my dead body?” Didn’t everybody already know which was the real option there? And again, there was that fateful full court briefing, where the finance minister lay down the law for the cabinet and growled at them for support.

Hafeez Shaikh’s tango today is no different from those of his predecessors. Our reserves are stable, for the moment, but inflows have dried up, inflation is knocking on the door, revenues are disappearing, and both deficits are yawning ever wider. Once again the finance minister of Pakistan is caught between the political elites whom he serves, and their creditors. The creditors are saying “tax yourself before you ask our taxpayers for help” while the elites are saying “you owe us the money for our services in the war”. Privately, the finance minister says the government is broke, publicly he announces everything is fine.

If history is any guide, then we know the following: the game today is about getting the Americans to release the funds, whether CSF or IMF, more than it is about “managing the economy,” or “governance” or anything else quite so grand. And look for this headline in days to come: “Shaikh briefs full cabinet on economy.”

Published in The Express Tribune, October 1^st, 2010.