EDITORIAL: Reportedly, the much-needed and important 9th review of the ongoing IMF (International Monetary Fund) programme has been delayed. It increasingly appears that the earliest the agreement (and the review process) would start is Mid-December, and the disbursement may not take place before January – after the winter break. This is going to be a dry cold winter for Pakistan’s economy — a winter of grim discontent, to say the least. That the writing was on the walls is a fact.
However, the incumbent government’s top priority is still the appointment of new army chief as it appears that it has relegated economic maladies to a convalescing Pakistan Tehreek-e-Insaf chairman Imran Khan who has been providing “diagnosis” for it through his warnings such as ‘the country is likely to default anytime soon’. After the replacement of Dr Miftah Ismail with Ishaq Dar, the government and establishment were hoping that Dar’s magic would work. Unfortunately, however, it did not for a variety of reasons.
The delay of the IMF review was very much on the horizon during Dar’s visit to Washington in connection with IMF and WB annual meetings. The government and its finance ministry were thinking that they could possibly camouflage their populist economic measures with the profound human misery that torrential rains and flash floods have caused in recent months.
However, it is not working. The Fund is rightly concerned at fiscal and external slippages. Therefore, it seems fair that the Fund has demanded the government come up with realistic estimates of floods expenditure.
It is important to note that the problem is multifold. The economy is highly dependent on imports. The growth story of Dar’s ‘glorious’ 2013-16 period was based on promoting import-based growth. Interest rates were kept low, and the exchange rate was overvalued to let the growth momentum spur. The fiscal house was managed by increasing the reliance of tax collection on imports.
The manufacturing was discouraged by increasing the duties and taxes on the import of raw materials and intermediary goods that are used in the manufacturing supply chains. Now it’s unraveling. And Dar is destined to reap what he sowed. This crisis started with external imbalances. Higher commodity prices and the absence of passing the impact on to consumers had imploded the imports. With drying external financing avenues, the government and SBP (State Bank of Pakistan) relied on administrative measures to force stop the imports.
The ploy did work. But there is no free lunch. The policy has multiple externalities. Apart from job losses, supply chain disruptions and significant slowdown of the economy, the tax revenues slipped too – and that slippage is higher relative to the other factors in real terms. The reason is quite simple: tax over-reliance at imported stage and on formal manufacturing sector. The import restriction is mainly in those sectors.
Now the IMF is asking to fill in the gaps. The prime objective is to attain the required fiscal primary balance. And to achieve that, a combination of revenue measures — both tax and non-tax, and curtailment of expenditure — both current and development — are required. This is happening at the time when the incumbent coalition government has decided to brighten its electoral prospects by offering to both targeted and non-targeted segments relief packages that envisage, among other things, subsidies and tax relaxations, under the rubric of relief to those affected by floods.
However, it may be added that the farmers affected by torrential rains and floods do deserve government support. The government and media need to realise that there is no automatic review completion. The external and fiscal revenues are to be reconciled. If the external gap is higher (which is the case), it must be financed by external sources. The issuance of short-term treasury bills through reverse open market operations (domestic injection of liquidity by the central bank) won’t cut it.
The finance ministry needs to realise that showing backward numbers is not enough to meet the targets. Revenue growth in the past few months has been high due to a spike in inflation. Now with the fall in imports, tax revenues in terms of GDP are falling. The IMF review doesn’t solely work on backward calculations, as there is some weight of forward projection in it. The ministry, therefore, needs to internalise this.
When the finance minister went to Washington, he was asked to provide granular details on flood losses and fiscal targeted measures required on these. Then the gap between the revenues and expenditure was required to be filled to bring the primary balance to permissible levels. The government only last week provided the detailed numbers; but those were based on backward performance. These are not realistic. They must have forward projections on fiscal and external accounts based on ground realities. The government needs to do it fast as time is running out. The foreign reserves are below the required levels of the IMF and the sovereign default peril is staring us in the face.
Copyright Business Recorder, 2022