Deciphering the nod from IMF

IMFs language in the statement issued after sanctioning its fourth tranche to Pakistan is almost the same, in essence, as that in its last review in August; it appreciated the countrys economic managers on the continuation of stabilization and structural reforms despite weak external demand and rather challenging security and political situation.
The Fund also acknowledged the authorities commitments to strengthen fiscal discipline amid soaring security related expenses and waived the 0.3 percent of GDP slippage in the fiscal deficit target of the first quarter - like it did in its last review.
One thing that stood out, however, is that the board addressed the vulnerability of weak private sector off-take for the first time since November 2008 while citing that the disbursement of foreign pledges and the successful implementation of VAT are imperative for mitigating the crowding-out phenomenon.
Yet at the same time, it emphasized the need for cautious monetary stance to counter inflationary pressures. Thus, the crux of macroeconomic stability is contingent upon the timely flows from the US and other friends of Pakistan, the success of VAT - due to be implemented by July 10 - and better governance of poverty reduction plans.
The trouble, however, remains that these structural impediments are not new to Pakistans economy and none from the IMF or from other bilateral donors have been able to orchestrate the reforms in many years, which in fact, have worsened in the last decade. But thats a long story on its own.
Sources reveal that IMF expects tax collection to increase by 3-4 percent of the GDP after the implementation of VAT and, in case of failure, the chances of going into a regular programme of IMF from this standby facility, which is due to expire by December 2010, are very much on cards.
On a related note, the transparency of direct cash subsidy to poor through BISP and other poverty reduction programmes is imperative to terminate this facility in time, as these subsidies are going to replace the existing indirect subsidies that are gradually being phased out under IMFs instructions.
Aside from these fiscal issues, the big question now is what will be the fate of monetary management in the central banks upcoming reviews.
Growth in monetary expansion is low and will likely stay that way. Out of the SDR 4.17 billion ($ 6.54 bn) which has reached the central banks pockets, around $360 - $370 million will be for fiscal support and for the improvement of social security network - allowing SBP to print around Rs30 billion. However, this might not increase money supply, as the government might use the fiscal support fund to retire some of its SBPs borrowing to meet IMFs quarterly target.
Even external account position - something on which IMF greatly links its decisions - is somewhat getting better.
With current account deficit expected to be half the IMFs initial target, healthy foreign reserves - which will exceed $15 billion after getting this tranche and the Saudi commitment - anomalies in inflation barometer and IMF concern over private credit, there are some chances of monetary easing by June. How will the State Bank view these developments, one has to wait until it unveils its next policy stance.