Why the delay!

EDITORIAL: The delay in the announcement of the successful completion of sixth review talks with the International Monetary Fund (IMF) subsequent to repeated statements by Advisor to the Prime Minister on Finance, Shaukat Tarin, post-dating the World/Bank/IMF annual meeting (that ended on 17 October 2021) that the agreement is imminent needs an urgent response as it has begun to fuel speculations that are negatively impacting the domestic market.

The Tarin-led Finance Ministry has implemented most time-bound conditions (though structural reforms remain pending) stipulated in February 2021 in the second to fifth review documents uploaded on the Fund website (with Pakistan represented by the then advisor to the prime minister on finance, Dr Hafeez Sheikh and Dr Reza Baqir, the incumbent Governor State Bank of Pakistan) - conditions that Tarin had initially pledged he would renegotiate and successfully phase out.

That did not materialise is evident given that the budgeted revenue target is more or less in sync for the current year as proposed in the February review (though the source of this revenue as claimed by Tarin through his out of the box proposals maybe under debate) and the base electricity tariff was raised in October, instead of in June as pledged by our previous economic team leaders.

There is no doubt that the government has been crowing about much better performance last fiscal year - 3.94 percent growth instead of the projected 2 percent backed by revitalization of the productive sectors. These figures, no doubt verified by the Fund staff, may have led to recalibration of what is doable in terms of implementing the harsh upfront reforms by the government in the last year of the Fund programme –- an insistence that may be based on the fact that 2022 is an election year and no Pakistani government has shown any stomach for implementing politically challenging reforms in an election year.

Independent economists claim that a major part of the 2020-21 growth rate was due to higher (i) household consumption, subsequent to the easing of the lockdown, hence sourced partly to inventories rather than new production; and (ii) higher government consumption sourced to higher borrowing, domestic and international, as the rates on offer were more than double what was prevalent in regional countries and in the West (including the rate on offer for Roshan Digital Account).

While critics may advise the Khan administration to desist from counting chickens before they are hatched, especially in a country where demand for eggs is more than for chickens due to eroding incomes, yet previous Pakistani governments also claimed successes with negative financial implications on macroeconomic indicators – an example being the claim by Shaukat Aziz during Musharraf’s tenure that Pakistan had reached the economic take-off stage, a statement no doubt for domestic consumption.

There is also speculation that perhaps the IMF is waiting for the Saudi pledge to lend 3 billion dollars, an injection still awaited though Tarin announced on 27 October that Saudi Finance Minister had informed him of the necessary approval – a deposit that is likely to provide some short-term stability to the rupee though it would also strengthen the borrowing component of our foreign exchange reserves to nearly 65 percent.

The raise in the prices of petroleum and products effective 5 November 2021, the government’s sustained failure to import essential items on time (particularly RLNG accounting for not only severe projected shortages but also a prohibitive rise in its price) and/or importing items, including sugar that it claims is in surplus with the objective of containing domestic prices (though failing to do so) is simply compounding the perception that even in its fourth year it remains unable to take informed decisions.

Part of the problem lies in its passing on the buck to others notably previous administrations/middlemen/aarthis/mafia and refusing to take account of its own considerable contribution in terms of a massive rise in its own expenditure.

Inflation can and does respond to short-term policies which must include a reduction in current expenditure not a massive rise from one year to the next, and a containment of the budget deficit instead of focusing on primary deficit that accounts for the massive rise in government borrowing that is fuelling inflation.

Cash disbursements/subsidies and credit at cheap or zero rates of interest are policies that were supported by previous administrations as well but they are inflationary unless backed by a banking sector that is unwilling to take the risks involved and income that the government does not have.

Copyright Business Recorder, 2021