EDITORIAL: The statement issued by the new International Monetary Fund (IMF) mission chief for the ongoing Extended Fund Facility Nathan Porter that “based on the constructive discussions with the authorities in Washington, the IMF expects to field a mission to Pakistan in May to resume discussions over policies for completing the 7th EFF review” is most welcome given four highly disturbing macroeconomic indicators for the period July-March 2022 as released by the government/State Bank of Pakistan: (i) foreign exchange reserves of 10.885 billion dollars by 16 April 2022 or less than two months of imports, with the recommended minimum foreign reserves to cover 3 months of imports; this does not take account of the fact that around 50 percent of the reserves reflect debt — be it direct injections from multilaterals and bilaterals (Saudi Arabia and China) and/or swap arrangements; (ii) trade deficit at a historic high of 35.39 billion dollars with the current account deficit at 13 billion dollars projected to be around 20 billion dollars by fiscal year end — the amount inherited by the Khan administration in 2018.
This is concerning as it is in spite of the steady rise in official remittance inflows compared to 2018; (iii) rupee strengthened during the first few days of the new government but has since continued a significant daily decline; (iv) a recent World Bank report noted that the consolidated fiscal deficit for the first quarter of 2022 showed an increase of 20.6 percent year on year; and (v) the Economic Affairs Division report released last week noted that the government borrowed 12.767 billion dollars while budget support accounted for 10.114 billion dollars — 79 percent of the total — with project assistance accounting for the remaining 11 percent.
Thus given the performance of these key indicators there was little option for any government — be it the Pakistan Tehrik-e-Insaf (PTI) administration or the Pakistan Muslim League-Nawaz (PML-N)-led government — but to seek IMF support and therefore it is fair to say that had Imran Khan survived the vote of no-confidence in parliament, his finance minister too would have emphasised the need for reengaging with the Fund on the seventh review.
An overarching prior condition of the Fund with the previous government before reengaging on the seventh review of the ongoing programme was to take “prompt action to reverse the unfunded subsidies”, as noted in the short statement issued by Porter, referring to the 28 February 2022 relief package announced by the then Prime Minister Khan facing mounting political deadlock.
The PTI administration’s explanation that the subsidy would be funded from higher tax collections (though collections were not higher than what was budgeted which implied that revenue was not in surplus) and dividends payable by oil companies (who had been unable to pay for the past several years due to severe liquidity issues) were not accepted by the Fund; and neither were they accepted by domestic economists or Business Recorder.
Thus it is little wonder that the government had to agree to “prompt action to reverse the unfunded subsidies” before the issuance of the statement of reengagement.
It is important to note that the seventh review has been deferred till May which would obviously imply that a decision to reversing the unfunded subsidies is a prior condition; however, it is unclear what precisely has Finance Minister Miftah Ismail agreed on, for example, would the reversal be phased out or be overnight and would it only be confined to an act of passing the entire cost of petroleum and products imports on to consumers or would it also include a revenue element, i.e., by re-imposing the petroleum levy (not levied at present) as well as the standard General Sales Tax of 17 percent. Given that the Fund’s statement refers to Pakistan’s request to extend the EFF arrangement till the end of next fiscal year (June 2023), one may assume that the government would be phasing out some of the other extremely harsh conditions agreed to by the Khan’s economic team leaders that would provide some relief to the public.
The Fund’s statement has fuelled intense speculation in the country as to the possible date of elections, given the request for EFF extension till June next year (and Pakistan’s history shows that political considerations have invariably been allowed to trump economic considerations) and whether the extension would come with an increase from the original 6 billion dollar EFF agreed in 2019 (which is not an extraordinary decision for the Fund as it had taken a similar decision during the 2008 Stand By Arrangement of 2008). These questions would be answered soon enough after the finance minister’s return to the country. It is hoped that he wouldn’t come back empty-handed.
Copyright Business Recorder, 2022