Window of opportunity

EDITORIAL: Growth in Pakistan, the International Monetary Fund (IMF) notes in its latest report titled “Regional Economic Outlook Update Arising From The Pandemic: Building Forward Better”, is set to rebound slightly to 1.5 percent in 2021 from the negative 0.4 percent last year. The Fund has projected 1.5 percent growth in 2020-21 in its 16 February 2021 staff-level agreement documents uploaded on its website last week, a projection that remains unchanged to this day, while the World Bank has projected a growth for Pakistan in the current year at 0.5 percent.

The two multilaterals’ growth projections for Pakistan are much lower than those projected by the State Bank of Pakistan (SBP) and the Pakistan Bureau of Statistics (PBS). The 19 March 2021 Monetary Policy Statement maintains that “while still modest, at around 3 percent, growth in fiscal year 2021 is now projected to be higher than previously anticipated due to improved prospects for manufacturing and reflecting in part the monetary and fiscal stimulus provided during the Covid-19 pandemic.” The earlier projection was 2 percent. The SBP projection is based on the 7.85 percent rise in large-scale manufacturing industries date noted by PBS for July-January 21 against the comparable period of the year before – a trend projected to continue for the latter half of the current fiscal year as per PBS and SBP, but clearly not supported by the multilaterals.

While critics lend more credence to the projection by the multilaterals as they maintain it is based on data provided by the government, sans taking account of political sensibilities, yet even the higher growth projections by SBP and PBS are below the 4 percent average for the Middle East/North African countries to which Pakistan belongs but also lower than a war-torn Afghanistan at 4 percent projected to grow by 4 percent this year.

Analysts, however, argue that the capacity of the government to focus on growth as a means to deal more effectively with rising poverty levels and inflation rather than through current emphasis on a cash strained Ehsaas programme (due to severely limited fiscal space) would remain compromised as it did pre-Covid-19 due to harsh upfront contractionary monetary and fiscal policies agreed on 16 February 2021 with the IMF. They further point out that instead of giving Pakistan some latitude given the ongoing severe Covid-19 third wave the Fund appears to have further tightened the noose as reflected by: (i) lower disbursement by 500 million dollars as per the 16 February 2021 agreement as compared to the original loan programme documents; and (ii) not changing the scheduled last review date on 2 September 2022 while raising the number of mandatory quarterly reviews from the original 3 (after March 2021 review) till the end of the programme to 5 after re-phasing. The Fund may well argue that the need for more reviews is due to the prevailing uncertainty associated with Covid-19 but one could also discern that these would put pressure on the government to implement the conditions in letter and spirit.

The question that is increasingly being asked is: does the government have any option to renegotiate the IMF programme design, particularly those components that seek to raise tariffs/charges payable by the general public (directly impacting on poverty levels) to recover mounting costs attributable to appallingly poorly performing public sectors? Three such sectors that have repeatedly formed the subject matter of stringent IMF conditions over decades with the conditions getting steadily more stringent as reforms remain unimplemented are the power, state-owned entities (SOEs) and the tax sectors. One would assume that the government would have to demonstrate to the Fund that it has begun the process of reforms with associated cost savings if the Fund is to relax the utility/tax rate raises envisaged in the second to fifth review report. A quick way to resolve this matter would entail: (i) slashing expenditure dramatically across the board instead of raising borrowing levels to fund the continued rise in non-development expenditure including implementing reforms that seek to target and rationalise subsidies and pensions; one continues to hear pledges to reform but nothing on the ground yet; (ii) development expenditure should be carefully prioritised after determining the internal and economic rates of return of any proposed project. A focus on public sector programmes relating to enhancing water storage capacity and deficient transmission sector maybe appropriate while at the same time there is a need to take some bold decisions to reflect markedly different losses in tariff determination of different distribution companies; raising generation capacity from cheaper energy sources when Pakistan has surplus electricity capacity, albeit from more expensive input sources, is a long-term rather than a short-term consideration; (iii) a plan for revival/sale of identified state-owned entities must begin to be implemented; and (iv) tax reforms must not dwell on the same conditions agreed by past administrations and reversed as soon as the Fund programme is over - an example being ending exemptions and special incentives to the productive sectors and compelling provinces where the PTI forms a government - Punjab and KP - to levy income tax on profits of the rich farmers commensurate to the one paid by the salaried class.

Although there is much talk of blaming previous administrations for the current poor state of the economy, the fact that an ascendancy in a country’s politics never ever implies a clean slate needs to be borne in mind; and any attempt to form a government requires not only accepting the status quo but to then try to make the appropriate changes that in turn would determine the fate of the ruling party in the next elections.

Copyright Business Recorder, 2021