With the successful sixth review board meeting of the IMF held on Feb 2, the uncertainty surrounding it has ended and sixth tranche will be released as a lollypop for meeting the prior conditions agreed in April’21 of a front loaded programme designed in 2019. Let us look at the crystal ball and search for a few likely scenarios to judge it as a successful culmination of the programme or a premature/lame-duck program terminated partly due to pandemic and Pakistan running out of geo-political and geo-strategic trump cards.
The dimensions are a) Remaining short life of the programme, b) Stabilization vs structural salvaging, c) Revised GDP as an opportunity for more debt and deficit financing and d) Political imperatives of the on-going election cycle.
a) Theoretically, we still have the seventh and the eighth review in the next seven/eight months to be held in April’22 and Sept’22, respectively. If both are squeezed in this time-frame and the IMF is generous in releasing the balance, it will be a face saving for the IMF and a win for the GOP in a T-20 economy match.
Another scenario is the merger of the 7th and 8th review board meetings in a single meeting by Sept’22 (near the end of 1st quarter of budget FY23) and to announce it as ‘Pakistan on road to sustainable recovery and structural reforms’, for world optics, basically putting a stamp on finance minister’s (FM’s) recent ‘irrational exuberance’ . If the life of the programme ends after the seventh review meeting and the last tranche is not disbursed, theoretically it will still be a pre-mature termination.
b) Whether and how any of the above scenarios develops depends on what, the IMF and GOP have on the agenda for the 7th and 8th review. Is it going to be purely monitoring of stabilization measures introduced now, e.g., fiscal, current account deficits and inflation or one or two additional prior ‘structural’ actions left over from the April’21 agreement? Taking 10 months to legislate a single structural reform and host of stabilization measures along with entrance of PTI into an election cycle as a factual data point, it will be almost impossible to pass during Feb’22-Sept’22 any new single ‘structural’ reform that requires a legislative nod.
It will be easier to monitor the stabilization measures with a fine tooth comb along with effective implementation of the State Bank Act as the risk is that it may suffer the same fate as the Debt Limitation Act of 2005, specifically in an early start of the election cycle. If the IMF refrains from imposing any new ‘structural’ prior actions due to above reasoning, does the April’22 and Sept’22 review dates offer any opportunity to the IMF to nudge the GOP into some further prior actions for stabilization in FY23? Historically, under the IMF programmes, the April and September review meetings revolve around stabilization measures emanating from the budget and its implementation in the first quarter. This time it won’t be different.
c) The pay-off in monitoring stabilization measures versus initiating any new ‘structural’ measure would be higher for the IMF particularly in this year for the following reasons:- The recent revision of GDP is a mixed challenge for macro-economic stabilization in Pakistan.
The debt/GDP has improved by 10-12 percentage points. Given the past trends in this ratio it would have taken 5-7 years to achieve this reduction. Similarly, fiscal and current account deficits to GDP ratios improved in one go, the latter without any structural measure. Of course the tax/GDP along with many social indicators as percentage of GDP worsened.
If left to its own ways and specifically in an election year, the PTI will be tempted to push the debt/GDP to its pre-revised GDP levels, at the cost of future generations. At this juncture, the April’22 review meeting on the contours of FY23 budget can be ‘soft’ prior action for continued stabilization and tranche release. Most likely under this scenario, GOP will request that the seventh review meeting be shifted to mid-May’22 in order to comply with the soft prior action. If the IMF wants that tax/GDP ratio be raised by 2 percentage points, one to bring it to the previous level and additional one to show real improvement, it may be a no-no in the current toxic political environment. If the GOP insists on implementing a ‘home grown’ budget for FY23, and request that expenditure and revenues of the first quarter FY23 will prove it right, the possibility that seventh and eighth review will be clubbed, cannot be ruled out.
It might also need a geo-political and geo-strategic trump card to pursue a ‘people friendly budget’ laden with fiscal goodies in an election year. However, successful holding of the last two review meeting and release of tranches is no guarantee that GOP will sincerely implement the soft prior action as once it exits the program in Sept’22 it has the prerogative of announcing fiscal goodies in a mini budget in January’23, eight months ahead of the election date.
d) The PTI saddled with the ‘force’ ownership of the remaining program is anxious to get out of it as soon as possible as it is inflicting a heavy cost on its popularity. Hopefully, the ‘ides of March” will pass smoothly without a political shock. Globally, as well as nationally, inflation is unlikely to taper off at least in the next 3 months, so populist measures to increase employment and subsidize cost of living for the vulnerable may be the only tool to reduce the pain of inflation and also win votes.
The budget for FY23 may reflect this desire when more freebies (it has already announced tax rates relief for salaried class) and grandiose white elephant construction programmes (as opposed to soft infrastructure which is desperately needed to enhance productivity and competitiveness) are announced under the slogan of “Construction as the mother of 22 industries” to create employment and wealth to win votes.
It will boost imports and thus facilitate revenue generation at the cost of further weakening of the rupee and diluting efforts to broaden the tax base. In summary, political exigencies and last-minute demand for pound of flesh from various mafias, including post-budget U-turns, a common ritual after the announcement of every budget, during quarter July-September’22 can pose a challenge for a successful 8th review in September’22.
This programme was a lame-duck programme from the very beginning. Lack of political ownership, pandemic waves followed by on-going episode of world-wide inflation and desperation to win a landslide victory at home forced it to follow in the footsteps of previous 20 failed programmes in terms of deep-rooted structural reforms and has left backlog of reforms for future governments.
Geo-political, Geo-economics (a new buzz word) and Geo-strategic are wrapped up in a deck of cards. Shuffling it any time can yield a ‘trump card’ to any of the players depending on the type of game and stakes involved. Lets’ hope when the GOP goes for another IMF programme in 2024, it gets a ‘trump card’ to wriggle out of tough structural reforms once again.
Copyright Business Recorder, 2022