EDITORIAL: The International Monetary Fund (IMF) has reached a staff-level agreement on the second to the fifth reviews of the PTI administration’s reform programme supported by the 39-month Extended Fund Facility arrangement for 6 billion dollars. This statement has generated considerable confusion and one would hope for some clarification from the Minister of Finance Dr Hafeez Sheikh has rightly described it in a tweet as a ‘good development.’
The confusion relates to a number of items including: (i) the loan arrangement was signed with the Fund effective July 2019 with the first disbursement of 726 SDR (one billion dollars) made the same month. The first review was completed 6 December 2019 leading to the release of the first tranche of SDR 328 (equivalent to 452.4 million dollars). The second review has been pending since 6 March 2020 (though the Fund website indicated that staff-level agreement was reached end-February 2020 subject to what many believed was the implementation of prior conditions by the government that remained pending due to the onslaught of Covid-19); (ii) lumping the second to the fifth reviews in one go may reflect a desire to keep to the original schedule of the arrangement irrespective of the delays due to Covid-19 which envisaged third review on 5 June 2020, fourth on 4 September 2020 and fifth review on 4 March 2021; (iii) the combined disbursements second to fifth reviews envisaged were 1544 SDRs equivalent to 1.07 billion dollars (second to fourth reviews envisaging disbursement of 328 SDRs each and the fifth review envisaging 560 SDR) though the disbursement as per the Fund website is around 500 million dollars. Does this imply that the subsequent disbursements would be higher to meet the original time-line of arrangement completion or would there be an extension to the timeline; and (iv) finally, if the original scheduled completion date of 2 September 2022 is to be extended then the next elections would be held while the country is on an IMF programme that would have serious bearing on the incumbent government’s political fortunes.
Details of the staff-level agreement that would determine the cost to the general public would be revealed after the IMF Board approves the release of the 500 million dollar tranche, considered a formality, followed by the usual Fund practice of uploading details on its website together with the Letter of Intent submitted by Pakistan’s economic team leaders –Minister of Finance Dr Hafeez Sheikh and Governor of State Bank of Pakistan (SBP) Dr Reza Baqir - pledging implementation of the time-bound reform agenda and structural benchmarks agreed. Pending the uploading of this document that would include specifics nonetheless the general consensus is that since January 2021 the government’s decision to raise electricity tariffs by about 6 rupees per unit in three phases, as well as to raise the price of POL products; and though the Prime Minister shot down Oil and Gas Regulatory Authority’s (Ogra’s) most recent proposal to raise POL products’ prices from 15 to 28 February (premised on the rise in the international prices of oil and products as well as the fluctuating rupee dollar parity) by reducing the petroleum levy; however, the Ministry of Finance sources informed this newspaper that the budgeted collections rupees 450 billion under petroleum levy would be achieved by end-June 2021. That these decisions reflect the sum total of the cost of the Fund agreement on the common man is misplaced optimism and one has only to look at the original loan agreement that envisages more pain.
The IMF downgraded the Gross Domestic Product (GDP) to 1.5 percent, against the budgeted 2.1 percent and upped the inflation from the budgeted 6.5 percent to 8.8 percent. These adjustments indicate that (i) the projected revenue in the budget, seen as a percentage of GDP, would have to be revised downward which no doubt prompted the Fund to state that the primary deficit (excluding foreign loan repayments that have been deferred by G20 due to the onslaught of Covid-19) would be as budgeted, thereby implying that there would be no reduction in revenue collections from what was budgeted (the 4.9 trillion rupee tax collection target is widely considered unrealistic); (ii) to meet the shortfall the government would have to rely once again on raising non-tax revenue. In 2019-20, the amount of State Bank of Pakistan profits was 935 billion rupees (against 650 billion in the revised estimates for the year) and one would assume that in the current year higher reliance maybe placed on privatization that would remain a challenge not only because of the pandemic but also because it is being vigorously opposed by workers; (iii) current expenditure continues to rise though the slash in development expenditure is not enough to contain the rise in budget deficit. In addition, the savings attributed to the Prime Minister and the President, although symbolically important, are simply too small a percentage of total expenditure to make any meaningful difference; (iv) the fiscal deficit projected at negative 7 percent is likely to rise as would total public debt though with the recent staff-level agreement multilaterals are likely to continue to engage with Pakistan; however, the country’s requirements of 38.6 billion dollars for the 39 months identified by the economic team in July 2019 necessitates reliance on expensive commercial loans and incurring debt equity; and (iv) higher projected inflation rate indicates agreement with the Fund to raise the discount rate, considered to be a prime factor in stifling output in the first eight and a half months of 2019-2020. In this context, it is relevant to note the warning by the Fund that the “SBP must continue to remain vigilant and prevent possible financial stability stress as the temporary support is phased out” - temporary support including the refinance facilities, 7 percent discount rate, and fiscal incentives to the productive sectors that are held responsible for the upswing in manufacturing sector’s growth rate. It is doubtful if the autonomy to the SBP envisaged by the Fund would be sufficient for it to withstand political pressures.
Copyright Business Recorder, 2021