EDITORIAL: Moody’s report on Pakistan refers to the continuing protracted negotiations with the International Monetary Fund (IMF) under the ongoing Extended Fund Facility (EFF) programme — that have dated since Shaukat Tarin was appointed finance minister on 21 April 2021 and continues to this day premised on misplaced optimism that the negotiation skills of a predecessor can easily be bested.
The report further maintains that delays would slow down the pace of EFF implementation which, in turn, are premised on economic, domestic (including low per capita and high inflation, high current account deficit, high debt with an associated deterioration in debt affordability from an already weak level) and global (high commodity prices though price of oil and products have declined in recent weeks), as well as political uncertainty (a more potent element after the by-election results in Punjab).
The need to go on the EFF was driven by the need for financial support for balance of payments as the current account deficit was at a historic high of 20 billion dollars in 2018. As per the Monthly Economic Update and Outlook June 2022, the current account deficit July-May 2022 is 15.2 billion dollars which is a source of serious concern for two reasons.
First, because while in 2018 the country was not yet on a Fund programme and therefore had the entire programme period of 39 months to implement the conditions, though the then economic team leaders did not opt for this approach, yet today the onus of harsh upfront conditions is all the greater because the country is at the tail end of the programme period, and this is in spite of the fact that the Fund has granted an extension of around nine months.
It is important to note that the fiscal consolidation demands by the Fund have been adequately met in the Finance Act 2022 that was enacted after a major overhaul of the budget proposals during the winding up speech of the finance minister signalling the adoption of all IMF’s ‘prior’ conditions rather than the recommendations by the relevant parliamentary committee.
While one may question the delay by the finance minister after he had repeatedly stated publicly that all roads lead to the IMF, yet one may assume this delay was premised on the aforementioned overestimation of his own negotiating skills.
Moody’s like the Fund insists that the budget’s fiscal proposals must be implemented. It is important to note that another rating agency, Fitch, has followed in the footsteps of Moody’s by revising its outlook on Pakistan to negative from stable. Yesterday, Fitch said, among other things, that there are considerable risks to the IMF programme’s implementation and to Pakistan’s access to the external finance after June 2023.
However, Business Recorder would suggest to the government to undertake major current expenditure cuts that require a major sacrifice from major recipients as well as reforms in the pension system that is fully funded without any employee contribution.
These measures would not only decrease the pressure to generate higher revenue from indirect taxes like petroleum levy which is an indirect tax and its incidence greater on the poor than on the rich but also decrease the need to borrow externally which is estimated at between 36 to 41 billion dollars this year alone that in turn would reduce debt servicing costs.
What however is more concerning is Moody’s projection that the central bank would continue to increase rates over 2022 because of ongoing elevated inflationary pressures. Moreover, the current negative real rates may not be sufficient to support import compression.
There is elevated inflation that can be laid at the doorstep of the Fund’s prior conditions due to three reasons. First, the policy rate in this country has little if any impact on headline inflation, which was 21.3 percent for June but does impact on core (non-food non-energy) inflation that registered 11.5 percent for June while the weekly sensitive price index 33.12 percent for the week ending 14 July 2022.
In other words, raising the policy rate to check headline inflation is unlikely to bear fruit for such a linkage does not exist in this country. Second, inflation is also imported due to the eroding rupee which post-Sunday by-elections has been taking a severe battering attributable to rising political uncertainty but it is also partly due to an undervalued rupee with a real effective exchange rate at 93.56 in May, against 95.87 in June and 96.6 in March 2022 — rates that contrast significantly with the flawed policy of overvaluation of the rupee during the last PML-N tenure to 121 in June 2017.
And finally, the rise in the policy rate will impact on the input costs of the large-scale manufacturing sector that is a significant contributor to not only the GDP, which has an impact on tax collections, but also to employment levels.
The rise in discount rate could well cripple the economy by more than in 2019 when the rate was upped to 13.75 percent that led to a 1.5 percent growth projection by the Fund under the EFF for the first year.
The Fund’s insistence on taxing those with an income of between 50,000 and one lakh rupees per month at the rate of 2.5 percent and those earning an income between one and 2 lakhs at 12.5 percent, a part of the Finance Act 2022, would erode their purchasing power considerably which if inflation continues at the existing rate would lead to a significant deterioration of their quality of life with perhaps serious socio-economic fallout.
The Moody’s report echoes warnings consistently raised by this newspaper and one would hope that instead of doing the usual — passing on the buck for all government misgovernance, past and present, onto the general public — a serious and sustained attempt is made to slash current expenditure, raise revenue but from those with an ability to pay or, in other words, from direct taxes which as per the budget 2022-23 account for less than 35 percent of all projected collections and last but not least to use the available monetary policy tools wisely.
Copyright Business Recorder, 2022