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Excuse the stock market for not saluting the staff-level agreement with the IMF (International Monetary Fund), subject to approval form its executive board of course, because it turns out that the whole wait was more about the interest rate than other ‘prior conditions’. Why else was the monetary policy committee meeting held a week ahead of time and the interest rate outlook more hawkish than the market’s upper-end expectations? And what led the Fund to paste the ‘good news’ on its website in the wee hours of Monday even though nothing had changed about the situation regarding the most contentious prior action - the SBP (State Bank of Pakistan) amendment bill - since before the interest rate announcement?

Perhaps the Fund expects the momentum from the joint session to continue, just like the government, or perhaps it’s been given some sort of ironclad commitment not yet disclosed to the public, like most other parts of the negotiations. Regardless, it’s very surprising that nobody has yet explained the implications of what the government is celebrating as a big victory for its own budget for the ongoing fiscal year. It was in late-June, after all, not long after Shaukat Tarin replaced Dr Hafeez Sheikh as the head of the finance ministry that the former abandoned the latter’s fiscal conservatism and just days later rolled out a pro-growth, expansionary budget that shocked everybody who had been working on reviving the Extended Fund Facility (EFF) with the IMF.

But the government, happy with the political dividends of the subsidy-laced budget, took Tarin for his word that he would bring the Fund round to his point of view. That, very clearly, has not happened. Instead the talks got stalled and one by one the finance ministry caved in, finally agreeing to take a hit equivalent to Rs800 billion from the ongoing fiscal’s budget, or 1.5 percent of GDP, just to secure the staff level agreement. Let’s not forget that the agreement is the first of two steps in reviving the programme and it’s all for nothing if the prior actions are not completed in time and the executive board does not like what it sees by end-December.

So the government has got itself a one-month window, at best, in which to rush a supplementary finance bill through the National Assembly, incorporate a four-rupee rise in the Petroleum Development Levy (PDL) every month, approve audit of Covid-related expenses and share details of beneficial ownership of vaccine providers, and also get the SBP amendment bill approved by parliament. That doesn’t leave the budget document looking quite the same, especially since FBR’s tax collection target has been increased by about Rs 300 billion to Rs 6.1 trillion, the Public Sector Development Program (PSDP) is being cut by Rs 200 billion (22 percent), and there will be another increase in the power tariff in the next few months, on top of the increase of Rs 3.63 per unit in two phases since February.

To say all this is being done because of a necessary shift from growth to stability might make them look mature, responsible and all that at press conferences - provided everybody’s forgotten all the chest-thumping at the time of the budget - but it does not hide the fact that the government green-lighted the whole year’s fiscal policy based on the assumption that the new finance minister would be able to persuade the Fund to dilute its demands just because he thought it was the right thing to do. The budget is not a one-quarter policy document, after all, and the withdrawal of tax breaks, subsidies and concessionary lending already has industry up in arms. So much for political expectations that was clearly given priority at the time of the budget.

Now even Shaukat Tarin has accepted that “difficulties of lower income groups will increase” although he did try to brush it aside by implying that any problems would be marginal and “targeted subsidies will (still) be given”. The finance bill will not be a big problem, even if its effects are likely to resonate very loudly all the way to the next election, so they are counting on parliament to pass the SBP bill without much trouble so the dollars can start flowing and other bilateral and multilateral institutions can also begin lending, giving our bond yields a shot in the arm in the process, while trusting the SBP discount rate to prop up the rupee and control what they are calling imported inflation.

Yet before they beat the drum too much about the rupee, they’ll have to make sure that it sustains long enough to discourage unnecessary imports. So far its turn owes more to expectation than concrete policy, and even if it rises enough to make another lower high, it is essentially breaking the fall rather than rising in real terms. And there’s nothing yet to suggest on technical chats that its fall has ended.

All things considered the revival of EFF is more implied than guaranteed at the moment, despite the advances of the last few months. And there might still be an issue or two to resolve before it is really in the bag.

Copyright Business Recorder, 2021


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