Why Did Shaukat Tarin Resign?
By Riaz Haq
CA
Pakistan's Finance Minister Mr. Shaukat Tarin has resigned. Tarin is an accomplished banker and a protégé 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.
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.
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 US.
"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.
