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EDITORIAL: Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), tweeted subsequent to a virtual meeting with finance minister Hammad Azhar and Governor State Bank of Pakistan, Dr Reza Baqir – the two officials that are signatories to the IMF programme loans – that “I commend Pakistan’s response to the health and economic crisis, and we discussed the way forward for vital economic reforms and external financing needed to build a better future for Pakistan’s people.” This was followed by Hammad Azhar, who unlike Baqir was not a signatory to the 16 February 2021 second to fifth quarterly review agreement, tweet, “Grateful that she [IMF MD] acknowledged the positive economic indicators and the need to keep the welfare of the people of Pakistan as the focus of all our policy endeavours.”

Two observations are in order. First and foremost, one would assume that with the SBP Governor unchanged there was little discussion, if any, on adjustment in the agreed time-bound structural benchmarks relating to the monetary policy agreed on 16 February that include: (i) “maintaining financial stability warrants ensuring that the financial emergency facilities and regulatory measures remain temporary to avoid a deterioration of banks’ assets quality” with a word of caution added with respect to Prime Minister’s signature support for house financing notably that the housing lending targets of 5 percent of their portfolio could present risks to financial stability and entail a misallocation of credit; (ii) timely approval of the SBP Act to boost its autonomy from parliament; (iii) urgent priority to progress towards completing the action plan with the Financial Action Task Force; and (iv) strengthen SBP’s balance sheet including building buffers. The Fund staff report argued that the accommodative monetary stance remains appropriate and one would assume that based on the third Covid-19 wave, highlighted as a risk by the Fund, the SBP would be able to retain the accommodative stance subject to the impact and duration of the third wave.

Secondly, compliance with the 16 February agreed conditions with respect to Ministry of Finance and other sectors that come under the administrative control of the political government would be very challenging for two broad reasons. One, because no elected member of parliament is going to support the harsh upfront conditions accepted by the then finance minister Dr Hafeez Sheikh – a man who, according to reports, had displayed a singular lack of empathy with the people of the country as far as agreeing to slashing subsidies, placing the entire burden of achieving full cost recovery of poorly performing utilities (particularly the power sector) on the hapless consumers and unrealistic tax targets (with ever rising emphasis on the low hanging fruit or burdening the existing taxpayers through ever rising sales tax collections whose incidence on the poor is greater than the rich).

Reports carried in a section of the media indicate that the Prime Minister chaired a meeting the same day to review the status of subsidies on wheat, sugar, electricity and gas with Tabish Gauhar, Special Assistant to the Prime Minister on power and petroleum, a non-elected member of the Prime Minister’s team, stating that it was agreed that the Power Division would prepare a new (power specific subsidies) roadmap for approval of the Prime Minister next week. The new plan has yet to be prepared and one would assume that there would be coordination with the Fund staff on this matter.

It is important to note that the cabinet was previously informed that total subsidies are in excess of 1.3 trillion rupees per annum and that the bulk of these subsidies are not targeted towards the poor and the vulnerable. The associated recommendation is to target subsidies through a medium such as the Benazir Income Support Programme to enable only the vulnerable to be eligible for subsidies. It is unclear how far along, if at all, is this plan in terms of implementation.

However, one complication may well arise in the Fund agreeing to a continuation of the accommodative stance and this relates to the projected growth rate. The same day as his virtual chat with the IMF’s MD, the Governor SBP during his interaction with the stock exchange players stated that he estimates a growth rate of 3 percent in the current year, a rate also projected by the government. This is double that projected by the IMF for the current year. With the third wave of the Covid-19 pandemic on the ascent and more devastating than the previous waves, ending the current fiscal year with a 3 percent growth rate would be a significant achievement.

Copyright Business Recorder, 2021


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