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AS the dust settles after the government’s recent confrontation with TLP protesters and the authorities struggle to put this episode behind them, the looming challenge of closing the current fiscal year, preparing next year’s budget and trying to keep within the constraints of the IMF programme present the biggest challenges the government is now faced with. Even though a written agreement on the adjustment path ahead has been released by the IMF, significant question marks remain that will need to be addressed before the adjustment can begin.
This is different. I have never seen a government embark upon an IMF programme where so many question marks bedevilled implementation from the very outset. The most critical uncertainty, over who will be the finance minister to implement the programme has now (finally) been resolved, though even here question marks remain. For one, Shaukat Tarin’s appointment is only for six months at the moment. He has to be elected to the Senate first to be able to hold the ministerial portfolio for longer than that. In order for this to happen, one senator of the PTI from a ‘safe seat’ needs to be persuaded to step down to make way for Tarin. Given how fraught the internal political situation has become within the ruling party, this could well prove to be a challenging task.
Tarin will be expected to first prove that he views with favour the demands of the ruling party’s MNAs and senators for greater resource allocations to them to spend in their constituencies. In all likelihood, this will be a “prior action” (to use the language of the IMF) before any political support is forthcoming for him. He has six months to demonstrate his seriousness in this endeavour, just like Hafeez Shaikh had six months from December onwards when the court required that he must hold elected office in order to wield ministerial powers. Shaikh failed to oblige and faced the consequences in his Senate defeat. Tarin will have to succeed in order to cement his position within the cabinet. Until then he is serving on borrowed time.
Next to this another gap between the Fund programme and the government’s own wishes remains. This one concerns the fate of the government’s housing initiative, the prime minister’s signature project that he regularly touts. Recall that Imran Khan was busy at the launch of a housing project on the very day rioters from the TLP were running amok in the cities of Punjab. Count up the number of times he has attended the launches of various housing projects in the past few months and you will notice that this is a bigger priority for him than anything else happening in the economic sphere.
Tarin will be expected to prove that he views with favour the demands of the ruling party’s MNAs and senators for greater resource allocations for their constituencies.
Among the critical enablers for promoting the housing sector, there are two that merit special attention from the point of view of economic management. The others relate to changes in land acquisition or environmental protection that are of a more general governance nature. These two are an amnesty scheme to channel so-called ‘black money’ into the housing sector, and the requirement on banks to increase their lending to the housing sector to five per cent of their total lending portfolio by December 2021. Under the amnesty scheme Rs186 billion had been pumped into the housing sector by December 2020 alone, and the scheme has since then been extended to June 2021. According to published reports, another Rs116bn was in process at the time the last data was released in December, and most of this money seems to have gone into land rather than construction, raising the risk that these incentives have in fact created a bubble in the real estate market rather than kicked off any real increase in housing stock for low-income people.
The government will come under pressure to perhaps extend the amnesty scheme beyond June of this year, and we will see how Tarin responds to this (should the pressure come). But already the Fund has made its scepticism known regarding the other leg of this project – requiring banks to increase their lending to the housing sector to 5pc of their total lending portfolio.
Here is how the staff report describes this requirement. “Staff urged the authorities to unwind this measure out of concerns for financial stability and efficiency. It noted that a direct and well-targeted budget subsidy programme for the vulnerable parts of the population would be a more effective way to achieve social policy objectives, and recommended stronger focus on addressing long-standing structural deficiencies to support private-sector lending.”
Translation: this requirement introduces risks into the financial system and there are better ways to help the poor than pouring money into housing and construction.
Let’s pause here to note that the State Bank has not sounded any such note of caution regarding this requirement, even though it is the body through which the requirement has been notified and its penalties are to be enforced. Either the State Bank does not agree with the Fund that this requirement raises “concerns for financial stability” or it is not making its reservations known, perhaps out of fear given how strong the ownership of this initiative is at the top. Either way it is problematic that we had to hear of these risks from the IMF before the State Bank.
Thus far, bank lending to the housing sector has not shown any significant increase since the initiative was announced last summer, so the motor force impact of this measure on the sector (and the economy as a whole) has not yet kicked in. But already the headwinds facing this initiative are increasing. It will be Tarin’s job to now navigate this landscape, and whether he chooses to shepherd the initiative through or see to its winding up will be another revealing instance. The politics surrounding this choice will be powerful though. Tarin must not ask for whom the clock ticks. It ticks for him.
The writer is a business and economy journalist.
Published in Dawn, April 22nd, 2021
