The finmins daydreams

The ministry of finance seems to be playing a merry go-round with the IMF, as another round of negotiation resulted in zero concrete conclusions.
Till a few weeks back, there were voices within the MoF that fiscal deficit would be as high as 8-8.5 percent. But that could have well been a tactical move by the politically motivated finance minister to pressurise high ups in the party as well as leadership in the opposition and coalition on taking economic reforms.
However, the move didn work out as PML-N ousted PPP in Punjab after the expiry of 45 days of its so-called economic agenda, albeit rationalisation of the cabinet and subsidising petroleum and electricity prices were in line with PML-Ns agenda. Tying the knot with PML-Qs unification bloc gave Sharif brothers just the right escape route to part their way.
Sensing that at a time when the IMF delegation is back on the negotiation table, Hafeez Sheikh, despite the non-materialisation of any reforms, has almost overnight become confident over confining the fiscal deficit at 5-5.5 percent of GDP.
It was premised on implementing a one-time flood surcharge and additional special excise duty through the presidential ordinance, which can only increase revenues by 0.3 percent of GDP. However, the Presidents office denied any such fiscal measure to be taken, as it would mean bypassing the parliament.
The Finmin also lobbied to increase the petroleum prices, after a lull of three months, by 10 percent to partially match the international prices hike in the past four months. But as expected, it turned out be a political move and the decision to revert half of the hike came in just three days.
The MoF officials are reportedly saying that there is no immediate need for IMF funds. Thats true! IMFs remaining tranches have nothing left for fiscal bridge financing, its all for budgetary support. With reserves covering 6 months of imports and the bonanza in cotton products and other commodities exports pricing, there is no need of an immediate cushion of further reserves until the time the government will have to start paying back the IMF.
But this conclusion is a no brainer. This seems like a mere statement to make up for the failure to convince the funds delegation. IMFs nod is imperative for fiscal support, and for poverty alleviation programmes committed by the World Bank, Asian Development Bank and Islamic Development Bank.
The other multilateral agencies support has been put on hold on account of non-compliance to IMFs conditions. It appears now that any measure is not possible before the budget, but with the weak political standing of the government, hoping for meaningful steps even in the budget would be akin to living in a fools paradise.
Nonetheless, be prepared for fiscal deficit of 6.5-7 percent. And keep your fingers crossed on economic stability amidst policy inaction.

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PSMC P&L

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Rs (mn)                         CY10    CY09     chg

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Revenue                       42,643  26,234     63%

Cost of sales                 41,639  25,665     62%

Gross profit                   1,004     569     76%

Gross margin                     2.4%    2.2%     8%

Distribution cost                197     215     -8%

Administrative exp               636     495     28%

Other opreating income           575     620     -7%

PAT                              211     255    -17%

EPS (rs)                        2.57    3.10

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Source: KSE notice.

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