The International Monetary Fund (IMF) in April and the World Bank (WB) in May 2020 scaled down Pakistan's growth projections for 2020-21 - from positive 2 percent and negative 0.2 percent respectively to one percent and 0.5 percent. This upward revision may be due to the projected impact of the incentives given by the government to the construction industry. The differential in growth estimates for 2020-21 between the two multilaterals may be sourced to assessing in different time periods - the Fund in its Rapid Financing Instrument (RFI) documents uploaded early April (though prepared in March when Covid-19 was not believed to have such a major impact on the country's fragile economy) and a more informed assessment in May by the World Bank.
It is however unclear whether the scaling down of the growth rate by the Fund and the World Bank is based on Pakistan returning to IMF's Extended Fund Facility (EFF) programme, and its associated harsh upfront conditions. The EFF is suspended since December 2019 though a second staff-level agreement was reached on 24 February 2020 subject to implementation of agreed "prior" conditions that, it was speculated, included the levy of higher utility tariffs (to ensure full cost recovery) and higher tax revenue collections than was considered realistic by the Federal Board of Revenue (FBR) at the time. The pandemic led to a suspension of the 24 February staff agreement with the Fund and disbursement of 1.6 billion dollar pandemic relief package under the RFI with the caution that "intervention in the foreign exchange market should remain limited to prevent disorderly market conditions.... regulatory measures and expanded refinancing schemes must be targeted and temporary and their design should not create a moral hazard nor foster poor credit risk management practices.... the authorities reiterated their commitment to resume reforms included in the EFF once the crisis abates." Pakistan is not under lockdown today and the Covid-19 situation is considered to be under control, in spite of a recent spike in infections, and undoubtedly the Fund is insisting on resumption of reforms pledged by the government in the EFF and the RFI.
Today, the usual handful of finance ministry officials engaged with the IMF are not talking to the media and the IMF Resident Representative, when asked, categorically stated that there will be no interaction with the media at this time. This leads one to assume that talks may have hit a snag based on the IMF insisting on the need to reengage in agreed time-bound structural reforms particularly in the energy and tax sectors on the one hand and to contain the budget deficit on the other - be it through curtailing expenditure or raising revenue, decisions which would have severe political repercussions on the government.
The high rate of inflation (over 9 percent consumer price index with food inflation estimated at over 15 percent), coupled with the government's decision not to raise salaries of public sector employees this year as a cost cutting measure that was reportedly supported by the IMF, has fueled general public discontent. Protests by the Civil Secretariat employees and the lady health workers were witnessed recently in Islamabad but the government managed to defer action till December 2020 - a time when the government may assume the second staff-level agreement with the IMF would have been reached and the tranche disbursed.
The Prime Minister met with prominent exporters just before the weekend who appreciated the efforts of the government to energize the export sector. The usual policy to support exports is to undervalue the local currency that make exports competitive internationally however while the rupee was depreciated massively during the past year yet exports did not rise by more than a few hundred million dollars. The reason could well be the high input costs, particularly electricity and fuel, relative to regional competitors. There is therefore a need to look at input costs as well as measures that focus on import substitution to minimize the trade deficit and earn foreign exchange rather than relying on borrowing to shore up our reserves.
Copyright Business Recorder, 2020
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