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EDITORIAL: The departure of Federal Finance Minister Shaukat Tarin to attend the International Monetary Fund (IMF)/World Bank annual meeting (11 to 17 October) and his possible return as Advisor to the Prime Minister on Finance as his six-month term as finance minister ends on 16 October may send a wrong message to key stakeholders in the country, including domestic markets and the business community with obvious repercussions on revenue.

There has been no visible move towards electing Tarin as senator, other than the issuance of the ordinance that would result in Ishaq Dar losing his senate seat due to his failure to take oath for more than three years.

Government sources argue that Tarin will remain the de facto finance minister irrespective of his designation, and international donors and lenders are unlikely to be deterred from negotiating with whoever the government decides to appoint as the country's chief negotiator.

It is important to note that the stalled sixth review talks with the IMF remain critical for the country's capacity to borrow from other multilaterals and bilaterals as well as at reasonable rates from commercial banks and equity markets.

The current year's budget envisages around 17 billion dollar external loans, however, multilaterals and bilaterals would not meet their pledges if the Fund programme is suspended while commercial borrowing and equity markets would lend at much higher rates.

Those who argue that it may be preferable to allow the ongoing Extended Fund Facility (EFF) programme to lapse and to then negotiate another programme that would allow Tarin to phase out the politically- and economically-challenging power sector reforms over three years instead of the one year remaining till the scheduled end of the EFF, are making three assumptions that were relevant in previous Fund programmes but may no longer be applicable.

First, the power sector reforms require a base tariff rise, agreed by Pakistani authorities in February 2021 that at this point in time would throttle economic activity leading to massive unemployment as well as further fuelling inflation.

The government has not been able to implement power sector reforms on the scale required (inclusive of lower transmission and distribution losses) and has yet to submit a Circular Debt Management Plan - CDMP - for approval by the World Bank - the lead agency in that sector notwithstanding its successful negotiations with the 2002 IPPs as the IPPs established under the umbrella of the China Pakistan Economic Corridor are unwilling to allow Pakistan to change its contractual obligations.

The key question however is whether Tarin would be able to successfully persuade the Fund that the new programme should not have upfront harsh conditions, which may be difficult given the fact that the incumbent government's approach to IMF lending and its concomitant pretty harsh conditionalities has been and will be hardly different from its predecessors' as almost all past governments were seen abandoning Fund programmes halfway through or as soon as the country's current account position stabilized, albeit modestly, for obvious political reasons.

Second, the revenue target for the current year is projected at over 6.2 trillion rupees, and to surpass the budgeted 5.8 trillion rupees as imports, a major source of revenue, are continuing to rise; however, the shortfall from the requirement of power sector subsidies of 550 billion rupees with the budgeted amount of 330 billion rupees would simply add to the circular debt. Thus expenditure would rise by more than is budgeted.

Foreign debt repayments would also rise due to the eroding rupee value though this would not apply in the current year given the G7 Debt Relief Initiative for Covid-19. And finally, Pakistan's foreign relations have evolved given the changing geopolitical considerations and the support of those who convinced the Fund in the past to tone down harsh conditions is no longer assured.

In view of the grimness of the foregoing, one would hope that the Prime Minister takes the necessary steps to meet his pledge and reappoint Shaukat Tarin as the finance minister as the fragile condition of the national economy demands a helmsman that is able to be fully functional and eligible to chair meetings of the Economic Committee of the Cabinet (ECC) and other forums.

It is also essential that the Energy Ministry comes up with a viable CDMP and the government must focus on reducing its expenditure to levels that would contain the budget deficit and reduce the pressure on raising taxes.

Copyright Business Recorder, 2021


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