Pakistan's Finance Chief Shaukat Tarin Quits

Pakistan's finance minister Mr. Shaukat Tarin has resigned. Tarin is an accomplished banker and a protege of former Prime Minister Shaukat Aziz. He became Pakistan's finance minister in October 2008 when the nation's economy was on the brink of collapse. He led the negotiations with the International Monetary Fund for a 23-month, US $7.6 billion bailout package that boosted Pakistan's foreign-exchange reserves and helped avert a sovereign default.

There have been rumors that the ruling PPP politicians, particularly President Zardari and his inner circle, have ignored Tarin's key recommendations to address the acute power shortages in the country. Zardari's insistence on pushing rental power projects, rather than fix the huge circular debt problem in the energy sector first, specially frustrated the outgoing finance chief, when he reportedly threatened to quit last year.

In spite of the obstacles Tarin faced in his job, he has managed to stabilize the economy. International credit rating agencies Moody's and Standard and Poor both raised Pakistan's credit rating and outlook last year as reported by Bloomberg News.

S&P increased its rating on Pakistan’s long-term sovereign debt to B- from CCC+, six levels below investment grade and the same ranking as the Ukraine and Argentina. The outlook was maintained as stable.

“The upgrade reflects Pakistan’s improved external liquidity position, coupled with its successes in implementing corrective policy measures to rectify an unsustainable fiscal trajectory,” S&P said in a statement. “A narrowing current account deficit, helped by buoyant remittance inflows, and successive disbursals of the IMF and other multilateral loans have reduced the risk of near-term external payment difficulties for Pakistan,” S&P added in its statement last year.

Tarin recently said that Pakistan's economy may grow by at least 3.4%--faster than previously estimated--driven by a likely rebound in its manufacturing sector.

"The economy has started showing signs of recovery, but more work is needed on structural reforms," Tarin was reported as saying by the media.

The manufacturing sector, which makes up 25% of GDP, is now forecast to expand 5.5% this fiscal year ending in June, 2010, after having contracted by a similar margin last year, Tarin said. However, federal finances will be strained due to higher military expenditure and subsidies on electricity, he added.

As a result of investor confidence in Mr. Tarin's economic leadership, Pakistan's KSE-100 stock index surged 55% in 2009 in US dollar terms and 65% in rupee terms, in a year that also saw the South Asian nation wracked by increased violence and its state institutions described by various media talking heads as being on the verge of collapse.

Media reports have recently quoted Mr. Tarin as saying the government plans to meet investors in March to raise between $500 million and $1 billion in the last quarter of the current fiscal year, ending on June 30.

Here's the latest IMF assessment of Pakistan's economy on Tarin's watch, as reported by a private news channel Geo TV:

Pakistan’s economic growth has started recovering despite security and energy challenges and the country met almost all targets under the International Monetary Fund program, the global financial institution said Tuesday.

“Pakistan’s program is progressing well,” the Fund said in a statement following “constructive discussions” with Pakistani officials focusing on Pakistan’s recent economic performance, the outlook for the rest of the fiscal year.

Adnan Mazarei, who met with the Pakistani officials in Dubai over the past week to initiate discussions on the fourth review under Pakistan’s Stand-By Arrangement (SBA), noted that Islamabad observed all quantitative performance criteria for end-December 2009, except for the budget deficit target, which was exceeded by a small margin.

Listing positive trends Pakistan registered in recent months, the Fund said the exchange rate has remained stable at Rs. 84–85 per U.S. dollar and the international reserves position has strengthened (the banking system’s gross foreign exchange reserves, including the State Bank and commercial banks, reached US$14.3 billion in mid-February, of this total the State Bank held US$10.5 billion).

The early signs of recovery in some sectors and the improved external position are encouraging, although there are risks and challenges to Pakistan’s economic program.

“Economic growth in Pakistan is starting to recover; large-scale manufacturing output has started to increase, the improvement in the global economy has helped manufacturing exports, and private sector credit growth has picked up somewhat as businesses rebuild their working capital.”

The IMF’s package for Pakistan - approved in November 2008-has been extended to $11.3 billion.

Looking ahead, the IMF statement said, a resumption of higher growth is needed to raise living standards and will require improvements in the business climate to stimulate higher investment by local and foreign investors.

The financial institution also noted that the “resolve of the Pakistani authorities to implement their stabilization and reform program is a key factor in deepening macroeconomic stabilization, despite the risks associated with internal security and uncertainty as to the pace of global economic recovery.”

Emphasizing the need for stepped up donors support for the key anti-terror partner of the international community, the Fund said early disbursement of donor financing remains crucial to support Pakistan’s stabilization and reform efforts and laying the basis for a high and sustainable growth.

The IMF mission staff will prepare a report on the fourth review under Pakistan’s SBA that is scheduled for consideration by the IMF Executive Board in late March.

Pakistan should be able to attract financing from abroad "to the extent that they can demonstrate that there has been progress on these three fronts: growth; stand-alone external liquidity; and quality and size of budgetary revenues," Aninda Mitra, a vice president at Moody's, told the Wall Street Journal.

Mitra said if Pakistan's economic growth could return to a range of around 4%-5% "sooner than later without generating macroeconomic imbalances or inflationary pressure, that will be a pretty notable outcome."

It is also important for Pakistan to be able to enjoy sufficient external liquidity without depending on further contingent support from external official sources and for it to manage long-term budgetary pressures, he said.

Financial markets appeared to take news of Mr. Tarin's departure in stride.

Pakistan's dollar-denominated bonds and the costs of insuring against a default or restructuring of its debt were steady Wednesday. Its five-year credit default swap was last quoted at 1,112 basis points, or hundredths of a percentage point, on the bid side while its bonds were hardly traded. With holders of Pakistan's bonds mostly buy-and-hold investors, and given the small size of outstanding issues, trading volume tends to be relatively low.

Wall Street Journal says Pakistan's fiscal improvement has stalled recently mainly due to unforeseen factors such as the delays in the receipt of pledged aid from friendly countries as well as the conflict in the northwestern part of the country and resulting delay in military reimbursement from the U.S.

"The government has had to issue debt to finance such shortfalls," Mr. Mitra said. "We don't think that these are permanent or deep setbacks for the fiscal situation regardless of the transition" of leadership at the finance ministry, he added.

Media reports indicate front-runners to succeed Tarin include Nasim Beg, CEO of Arif Habib Investments Ltd.; Planning Minister Makhdoom Shahab-ud-Din; and Junior Minister for Economic Affairs Hina Rabbani Khar, who presented the 2009-10 budget in parliament last year.

Although IMF is closely watching Pakistan's economic management for now, I believe it is still very important for the next finance minister to be persuasive, and display sufficient independence from the political leadership in managing the nation's economy as a professional.

Related Links:

US Fears Aid Will Feed Graft in Pakistan

Pakistan Swallows IMF's Bitter Medicine

Shaukat Aziz's Economic Legacy

Pakistan's Energy Crisis

Karachi Tops Mumbai in Stock Performance

Musharraf's Departure Imminent

Secret talks between representatives of President Musharraf and PPP Co-Chairman Asif Zardari have produced an agreement that allows Musharraf immunity in exchange for agreeing to resign immediately.

"Musharraf will neither face impeachment nor be prosecuted," said one person familiar with the situation. He is expected to step down once a guarantee of safe passage and immunity from prosecution has been struck. "We expect a major development in the next 48 hours," this person said, according to the Wall Street Journal.

President Musharraf seized power in a military coup against then Prime Minister Nawaz Sharif in 1999. Mr. Musharraf's major accomplishment during these years was to put the economy on a sound footing and on a growth trajectory that more than doubled Pakistan's GDP during his time in office. Growing economy helped double the size of the middle class. Pakistan changed in fundamental ways by the proliferation of private TV channels and other media. But he also made many enemies by siding with the US in fighting terrorism, cracking down on the Islamists, restraining the vibrant media he helped create, and firing the chief justice and dozens of senior judges of the country.

The President delivered on his promise to hold free, fair and relatively peaceful elections that swept his allies out of power earlier this year. He has come under increasing pressure to resign since the elections in February, 2008. Recently, Mr. Asif Zardari joined Mr. Nawaz Sharif, who has a personal vendetta against Mr. Musharraf, to ratchet up the pressure by announcing plans to impeach the President.


Prior to the start the actual impeachment proceedings, the coalition partners have demonstrated their strength by asking the provincial legislatures to pass resolutions supporting Musharraf's impeachment drive. While the vote against President Musharraf was generally expected to pass in Punjab and NWFP assemblies, the recent vote against him in Sind Assembly showed that even the members of MQM, his staunchest allies, decided to abstain rather than side with the President. This came as the clearest indication yet that his supporters have decided to retreat in the face of mounting pressure for him to resign. The President's support has almost entirely collapsed.

Musharraf's resignation seems likely to trigger a new wave of instability in Pakistan as the two main parties in the coalition government jockey for his share of power. It would also remove from the political stage the man who has become a favorite whipping boy for various groups including the lawyers, the rights activists, the Islamic radicals, and the politicians of various stripes, brought together by nothing more than their common hatred of Musharraf. Once these diverse elements accomplish this goal, each of them will, in all likelihood, continue to agitate for their own separate, conflicting agendas, contributing to greater instability. Ironically, this resignation will shine the spotlight with greater intensity on the incompetence and corruption of the new civilian leadership as people demand solutions to their real problems such as high inflation, unemployment, security and serious ongoing power outages.

While accountability of its leaders is healthy for a nation, the process must be fairly implemented and no one should be above the law. The process should be designed to improve the overall quality of governance in Pakistan. Musharraf, Sharif, Zardari and others must all be held equally accountable for their current and pass actions for the process of accountability to be fair and balanced.

The US media are focusing on how Pakistan fares in a post-Musharraf era as a paramount concern to the U.S., where officials have become increasingly concerned about the country's direction. Mr. Musharraf's pro-American stance and his military campaign against Islamic insurgents in his country have given way to a troubled strategy of peace deals with militants, says the Wall Street Journal.

With the expected exit by President Musharraf, and Barak Obama’s likely success in the upcoming US presidential elections, I think the unresolved Kashmir issue will have a much bigger negative impact on all of South Asia. President Musharraf was very sincere in his efforts to permanently resolve the Kashmir issue with India. The prospect of Kashmir resolution led to improved relations between India and Pakistan, with George W. Bush’s backing. With Obama’s stated hawkishness about the growing Taliban insurgency in Pakistan and Afghanistan, and India’s growing influence in Afghanistan, Pakistani government is likely to come under intense domestic pressure to take a firm stand against the US and India, and it will be forced to see the warming relations between the US and India with greater suspicion.

Pakistan is entering a new era where there will be greater uncertainty, less clarity on who is in charge, bigger economic problems, increased corruption, more intense violence and spreading chaos with Musharraf's absence from the scene. It will be a real test of the recently elected politicians to maintain a basic semblance of law and order, and political stability, and to continue to meet Pakistan's international obligations in this new post-Musharraf era.