There is considerable debate amongst economists on the patently unrealistic time-bound macroeconomic targets for next fiscal year 2020-21 contained in the April 2020 (last) staff report uploaded on the International Monetary Fund's website titled Request
There is considerable debate amongst economists on the patently unrealistic time-bound macroeconomic targets for next fiscal year 2020-21 contained in the April 2020 (last) staff report uploaded on the International Monetary Fund's website titled Request for Rapid Financing Instrument (RPI). While the IMF repeatedly emphasized the prevailing heightened uncertainty due to Covid-19 in the report yet it also repeatedly stated that all decisions associated with mitigating the impact of Covid-19 on the public "must be targeted and temporary focusing on immediate health spending needs and protection of the most vulnerable while preserving long-term sustainability." Long-term sustainability can only be achieved through adhering to the structural reforms agreed under the ongoing Extended Fund Facility programme (suspended due to Covid-19), particularly with reference to the power (with rising circular debt) and tax (failure to widen the tax net) sectors, as well as governance reforms in other state-run sectors (with rising losses of state-owned entities), that have been identified in programme after programme by the IMF and other lending agencies and which political governments, including the incumbent, have yet to implement.
Disturbingly, these structural reforms remain pending and the RFI report notes that "risks associated with policy slippages and resistance to reforms, including from vested interest groups, loom large." One would hope that the Prime Minister spearheads the implementation of these reforms with the same commitment and oversight that he is displaying in mitigating the impact of Covid-19 on the poor and vulnerable.
The RFO document made some new estimates/projections for 2019-20, including a growth rate of negative 1.5 percent; however, other data in the report indicates that the IMF inserted projections for the current year that may have been agreed with the Pakistani authorities under the second quarterly mandatory review report, or pre-Covid-19, many of which would have to be revised further post-pandemic. In this context, it is relevant to note that staff agreement on the second mandatory review was not reached during the staff mission in Pakistan (3-13 February) but was reached on 27 February with negotiations continuing from IMF headquarters. Board approval was deferred till early April prompting many to conclude that pre-tranche release conditions would first have to be met. One such tranche condition at the time doing the rounds in the Ministry of Finance was that the Fund was unwilling to reduce the tax revenue target from the 5.23 trillion rupee set in the first review (revised downward from the original target of 5.5 trillion rupees) to 4.6 trillion rupees proposed by the government and was instead insisting on 4.9 trillion rupees. The RFI document notes tax revenue at 4.6 trillion rupees which has been revised downward by the government to 3.9 trillion rupees due to the pandemic. The tax target for the current year is therefore much lower than was being projected in February and with a lower base the target set for next year at 5.1 trillion rupees (against the pre-Covid-19 programme target of 7.25 trillion rupees) is in all probability going to be revised downward.
What is however interesting to note is that pre-Covid-19 programme expenditure for the current year was set at 10,204 billion rupees while the projection for the year has been noted at 9,835 billion rupees or a reduction of 368 billion rupees (as opposed to an increase given the 1.2 trillion rupee government's Corona relief package). This strengthens our assessment that there is little if any additionality in the relief package itself.
The RFI report notes that "the baseline assumes a gradual lifting of containment measures and normalization of economic activity both domestically and internationally in FY 2021 but a deeper slowdown cannot be ruled out if these assumptions do not materialize." Clearly, the IMF's thinking is that the pandemic associated lockdown may be a lot longer than it envisages; however, with the slow but steady lifting of the lockdown in Pakistan, especially after the recent Supreme Court directives to reopen markets coupled with the decision of the Prime Minister to increasingly open the productive sectors, the Fund staff may conclude that the country has weathered the storm and can revert to the EFF, a view strengthened by the statement in the RFI that "the authorities' commitment to the current EFF programme mitigates some of the downside risks and their decisive policy and reform implementation would support a faster recovery in the coming years."