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EDITORIAL: There is intense speculation as to the reasons behind the tardy progress in the Pakistan authorities reaching a staff-level agreement on the seventh review with the International Monetary Fund (IMF) though there are credible reports both within the country and outside, that the staff-level agreement is imminent.

The budget has been passed by parliament and the politically challenging amendments to the finance bill are now being implemented that include a 10 percent supertax on 13 sectors with projected negative implications on output as well as inflation and the levy of a personal income tax of 2.5 percent on those earning 50,000 to 100,000 rupees per month and 12.5 percent on those earning 100,000 to 200,000 rupees per month (income groups that would witness a significant further deterioration of their purchasing power after the recent raise in the utility bills — electricity and gas — as well as headline inflation).

Finance Minister Miftah Ismail claimed more than a week ago that the draft of the Memorandum of Economic and Financial Policies (MEFP) detailing time bound actions as well as structural benchmarks applicable for an entire range of sectors has been received and forwarded to the relevant ministries/departments for their comments/compliance which is still awaited. Reports from Washington DC where the Fund is headquartered indicate that negotiations are ongoing and have yet to hit a snag.

So where is the stumbling block to the staff-level agreement? To date the Fund has not uploaded any document on its website that indicates that the sixth review commitments (dated February 2022) remain valid — commitments that remained unmet by first the PTI (Pakistan Tehreek-e-Insaf) administration and delayed by over six weeks by the PDM (Pakistan Democratic Movement) administration.

It is also evident that in spite of claims of a growth rate of around 6 percent in the outgoing year by members of the Pakistan Tehreek-e-Insaf, the second high growth year running, as indicative of a stable economy yet this was on the back of a very low base (negative 0.5 percent growth in 2019-20) and implementation of unsustainable expansionary monetary and fiscal policies in the aftermath of the pandemic with Pakistan’s other macroeconomic fundamentals remaining very weak and heavily reliant on external and domestic borrowing — the former rising from 95 billion dollars in 2018 to over 140 billion dollars in 2022 and the latter at 16.5 trillion rupees in 2018 to over 27 trillion rupees in 2022.

True the sixth review pledges are in all probability the starting point for the ongoing negotiations but what has been muddying the waters are pledges by the government’s economic team to the Fund that it failed to meet because of initial cabinet opposition — including ending the 28 February relief package and failure to include the agreed tax reforms in the budget, reflected by the massive amendments to the finance bill in the finance minister’s winding-up speech to parliament.

The Fund, as is the norm, is not publicly confirming or denying any of these claims though, contrary to its usual practice, it uploaded the following on its website: “discussions between the IMF staff and the authorities on policies to strengthen macroeconomic stability in the coming year continue, and important progress has been made over the FY23 budget” — progress that clearly falls short of the pledges.

Independent economists reckon that the delay in the staff-level agreement is sourced to additional prior conditions that did not form part and parcel of the sixth review as neither the global economic situation nor Pakistan’s macroeconomic situation today is, as projected in February before the Russian invasion of Ukraine; and therefore of serious concern to the Fund is the unrealistic budget 2022-23 macroeconomic framework of 5 percent growth, overall deficit of negative 4.9 percent with a primary balance of 0.2 percent (the Fund is reportedly insisting on 1.2 percent).

Political pundits however argue that the delay may well be because the government fears that the implementation of some prior conditions may have repercussions on the results of the critical 20 by-elections in Punjab scheduled on Sunday and once that hurdle has been successfully overcome then the remaining prior conditions will be implemented.

The government remains committed to the IMF line in all matters and has yet to employ out-of-the-box measures to gain leverage with the Fund in terms of phasing out some politically challenging but economically necessary reforms.

That initiative appears to be lacking in both the monetary and fiscal policy domains and one would hope that more focus is placed on seeking voluntary sacrifices by the major recipients of the budgeted allocations. The savings so far announced by the Shehbaz Sharif-led government are, like its predecessor’s, unlikely to be more than half a percentage point of total budgetary expenditure.

Copyright Business Recorder, 2022

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