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EDITORIAL: As expected the International Monetary Fund’s (IMF’s) Board of Directors approved the release of the sixth tranche amounting to one billion dollars subsequent to the recent passage of the two politically controversial bills — Finance Supplementary Bill envisaging the withdrawal of exemptions amounting to 343 billion rupees with the government claiming 280 billion rupees would have no impact on prices as this amount would be refunded while the Governor State Bank of Pakistan termed it fiscal consolidation and the State Bank of Pakistan Act (Amendment) bill granting autonomy to the apex bank in its monetary policy decision-making.

The jury is still out whether the political cost paid by the government for the conditions agreed under the sixth review (ranging from “prior” to post-tranche release conditions that include raising utility rates) would more than balance out the economic gains associated with the tranche release, gains that include: (i) strengthening the rupee though to-date gains have been marginal and economists predict that the rupee-dollar parity is not going to go much below 175 as it is being used as a tool to contain imports; and more critically (ii) enable the government to borrow at cheaper rates from other multilaterals/bilaterals/commercial banks abroad as well as at rates to be offered on issuance of sukuk/Eurobonds as the Fund tranche release would provide creditors the comfort level that the country will remain embarked on a reform agenda dictated and meticulously supervised by the Fund. The government has budgeted over 14 billion dollar external borrowing for the current year — required under the IMF programme with roll-over of previous loans from friendly countries amounting to over 11 billion dollars.

The tranche release was followed by a visible sigh of relief amongst government officials in general and the Ministry of Finance in particular that one major hurdle in the way of meeting the budgeted expenditure, requiring programme/budget support, has been successfully dealt with.

Critics may lament the government’s lack of focus on the rise in current expenditure during the PTI administration — from around 4.3 trillion rupees it inherited in 2018 to over 7.5 trillion rupees in the current year — a rise that ideally should be massively cut through major sacrifices by all recipient groups with the objective of decreasing the country’s dependence on foreign borrowing as well as domestic borrowing (which has risen from 16.5 trillion rupees in 2018 to over 27 trillion rupees today); but government sources claim victory and are crowing about the 5.57 percent rise in the Gross Domestic Product (GDP for last fiscal year after the rebasing exercise from 2005-06 to 2015-16 prices), higher profits by major industries and in the farm sector as proof that the economy has rebounded.

Ignored are the danger signs notably: (i) the widening of the trade deficit during the last two months that is fuelling the current account deficit, and if this trend continues then a level may be reached by the end of the current fiscal year that is comparable to around 20 billion dollars — the amount the PTI administration inherited in 2018; (ii) the failure to meet the tax target in December 2021 which has become significantly wider in January 2022 though the rise in revenue (sourced mainly to higher imports) during the first five months of the current year gives an impressive rise in total collections for the first seven months of the current year compared to the comparable period of the year before; (iii) contractionary monetary and fiscal policies as part of the agreed post-IMF tranche release conditions that would put the kibosh on economic activity and therefore the GDP growth and profitability of industry and farmers would decline irrespective of interest-free loans given to the small operators in these sectors; in addition, the industrial output curve noticeably flattened during the previous two months; and (iv) sustained mismanagement as indicated by the failure to import LNG on time for the third year running, thereby generating severe shortages and the failure to provide urea to farmers.

While the Fund has uploaded on its website the precise terms and conditions agreed by the Pakistani authorities and signed off by them yet one can surmise that one of the decisions that may well be taken by the middle of this month is raising the petroleum levy and sales tax on petroleum and products to levels higher than those effective till 31 January, which will fuel inflation further.

In addition, the reliance on bank borrowing, the government can no longer borrow from the SBP as per the SBP amendment bill, may well raise the budgeted mark-up cost which in turn will compel the government to reduce the development outlay, a standard normal policy that continues to this day.

In other words, the budgeted deficit of negative 6.3 percent, projected at negative 6.9 percent by the Fund in its press release dated 2 February 2022, may constitute the best possible scenario as opposed to the most likely scenario — a statistic that would explain the Fund’s projection of 10.2 percent inflation for the current year as opposed to the budget’s 8.2 percent.

Copyright Business Recorder, 2022

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