IMF: capitulation?

Shaukat Tarin, since his appointment on 16 April 2021 as Finance Minister, has repeatedly pledged that he would renegotiate the extremely harsh terms and conditions agreed by Dr Hafeez Sheikh and Dr Reza Baqir, the two economic team leaders in February 2021, under the 6 billion dollar International Monetary Fund (IMF) Extended Fund Facility (EFF) programme - conditions documented in the staff report on the second to fifth review uploaded on its website in April this year.

Two conditions agreed in February by Pakistan that were particularly onerous to the new Finance Minister were raising the base tariff by 1.39 rupees per unit in June, which he argued would not only raise the cost of doing business but also impact on a householder as the value of each rupee earned would erode; and the country's revenue base would rise through higher productivity, therefore his emphasis on growth, as well as raising tax revenue by widening the tax net.

This past week a widespread sense of betrayal pervaded throughout the country subsequent to Minister of Energy Hammad Azhar's press conference on Friday and a news report on an ordinance to be promulgated within a week or so ending sales tax exemptions amounting to 330 billion rupees (including zero rating) that would impact on domestic prices and perhaps exports (not officially contradicted).

Azhar pronounced on Friday that electricity base tariff will be raised by 1.39 rupees per unit, the precise amount that Pakistan's economic team leaders had agreed with the Fund in February 2021. In this context it is relevant to note that Tarin had not opposed raising electricity tariff under the fuel adjustment charges because such charges work both ways and therefore may not be permanent depending on the price of oil (fuel) in the international market but had opposed a rise in base tariff which is for all times to come. When asked whether the Finance Minister was privy to the decision to raise tariffs Azhar stated: "I had discussions with the Finance Minister and World Bank via video link on 14 October when I informed the World Bank chief that we are going to increase power tariff by 1.39 paisa per unit." Azhar further stated that consumers using less than 200 units will not be affected by the increase in electricity rate and nor will it affect the industrial package.

Critics of Tarin are accusing him of capitulating to IMF demands while his supporters argue that he has decided on a strategic withdrawal as he met with extreme resistance from the Fund that he had not experienced in 2008 when he had negotiated the Standby Arrangement (SBA) with the Fund.

So what were the conditions in 2008? The country was grappling with the highest ever international price of crude oil - over 140 dollars per barrel - as well as high food prices which accounted for a consumer price index of over 20 percent in 2009.

The Musharraf-led government extended massive subsidies on petroleum and products for political considerations (2008 was an election year) which accounted for negative 8.4 percent current account deficit and 7.6 percent fiscal deficit (as a percentage of Gross Domestic Product), with GDP growth estimated at 4.1 percent. In 2009 after the country went on a Shaukat Tarin-negotiated IMF programme the current account deficit registered 5.6 percent of GDP, fiscal deficit declined to 5.2 percent of GDP and GDP plummeted to 1.9 percent. It is relevant to note that neither the current account balance nor the fiscal deficit became a source of concern in 2010 or 2011 in spite of the IMF suspending the programme in 2010 for failure to implement the politically challenging power sector and revenue reforms. The current account deficit registered 3.8 percent in 2010 and 4 percent in 2011 and the budget deficit was negative 5.1 percent in 2010 and negative 4.2 percent in 2011. GDP growth picked up in 2010 at 3.7 percent and registered at 3 percent in 2011.

Today the oil price is over 80 dollars per barrel, a lot lower than the price in 2008, however there are concerning factors reflected by key indicators: (i) the budget deficit has remained unsustainable for the past three years at above 7 percent; (ii) the current account deficit was sharply curtailed in the first year of the programme at a pace that crippled the economy (IMF projected a growth of 1.5 percent for the first year of the programme). In spite of remittance inflows reaching historical highs, a trend that continued in the first quarter of the current year, current account is being heavily supported by borrowing which makes it unsustainable in the long run. GDP growth was 3.9 percent last year though it was mainly due to a rise in consumption (particularly of cars and construction associated industry reportedly fuelled by the parallel illegal economy due to the amnesty scheme offered by the prime minister to this sector last year though cement sales are down in the first quarter of this year); (iii) the problems of the power sector have multiplied manifold since 2008 with ever rising capacity payments, recent delays in procurement of LNG and failure to bring down distribution and transmission losses; or in other words, deferment of reforms in the sector as negotiated in previous IMF programmes may perhaps account for the IMF's refusal to accept another deferral of the agreed tariff raise for June; and (iv) the budgeted revenue generation for 2021-22 was premised on the second to fifth review growth projection of 1.5 percent which was upped to 3.9 percent hence the ordinance on withdrawal of sales tax exemptions.

The Fund today is reportedly not subject to any pressure from its major donors, particularly the US, to tone down its conditions as in 2008 and is therefore basing its rigid stance on two factors. First, Pakistan authorities agreed to a set of quantitative and qualitative reforms in February and these must be implemented before the release of the next tranche. The Fund is unconcerned with a change of personality at the helm. And, second, Pakistan has a long history of agreeing to harsh conditions and delaying implementation of politically challenging conditions indefinitely - a fact reflected by the appalling state of the power and tax collecting sectors today. Thus with no US pressure the Fund is unwilling to back off.

As these lines are being written Tarin has opted for a strategic withdrawal because of two major elements that were projected in the second to fifth reviews. First the external financing requirements for 2021-22 (gross) are 23.6 billion dollars, projected at around 17 billion dollars in the budget, with long-term borrowing (non-IMF) accounting for 6.9 billion dollars, bonds one billion dollars and short term (at high rates of return for short periods) at 6.1 billion dollars. Current account deficit is projected at 4.1 billion dollars this year (likely to be much higher if the current trade deficit trend continues). And its corollary available financing is estimated at 27.6 billion dollars - 10.7 billion dollars from official creditors (non-IMF) which is unlikely to be disbursed if Pakistan is not on an IMF programme while borrowing from the IMF this year is projected at 2.1 billion dollars.

The question as to whether Tarin's strategic withdrawal would be sufficient to ensure a conclusive outcome of the sixth review still hangs in the balance as the Fund has reportedly expressed reservations over the key macroeconomic projections submitted by the government based on policy withdrawals.

Tarin is between a rock and a hard place and there is little option but to empower him to mercilessly slash expenditure. This appears unlikely given that elections are fast approaching.

Copyright Business Recorder, 2021