EDITORIAL: The International Monetary Fund (IMF) submitted the Memorandum of Economic and Finance Policies (MEFP) to Pakistan authorities and issued a statement in the early hours of 10 February.
While the sharing of the MEFP is usually regarded as an indication that the Fund and the authorities have agreed to specific time-bound conditions and structural reforms, be they to be implemented prior or post-tranche approval, yet it also implies that the Fund has put its own final position in black and white and is unlikely to budge from these specifics.
The slight ambiguity on the finality of the MEFP is attributed to Finance Minister Ishaq Dar’s press conference at 9:30 in the morning of the 10th during which he stated that the authorities would review the MEFP over the weekend and get back to the Fund team during the scheduled virtual meeting on Monday (yesterday).
We urge the government to realize that time is of the essence, as Pakistan’s foreign exchange reserves have plummeted to 2.91 billion dollars – less than two weeks of imports, and that already much time has been lost first due to the misplaced perception that the Fund can be convinced to phase out the harsh up-front conditions (in spite of the fact that the previous two finance ministers took the same position and were forced to abandon it) as well as violating/reneging on agreed/pledged policies in the previous quarterly reviews - notably controlling the interbank exchange rate and announcing unfunded subsidies.
It is important to note that Finance Minister Ishaq Dar during the press conference reiterated and clarified key priorities stipulated in the Fund statement. These include: (i) strengthening the fiscal position with permanent revenue measures or, in other words, the Fund’s position is to implement additional revenue measures that are permanent and not withdrawn by the end of the current fiscal year.
This implies that the flood tax reportedly proposed by the Federal Board of Revenue to raise revenue is not part of the agreement with the Fund to generate 170 billion rupees by the end of the current fiscal year, a figure revealed by Dar, as these additional taxes would be permanent revenue measures; (ii) reduction in untargeted subsidies, which implies that the 110 billion rupee unfunded electricity subsidy to exporters announced on 6 October last year would end as would the subsidy envisioned under the farm package announced end-October last year; (iii) scaling up social protection to help the most vulnerable and those affected by the floods – a decision that as per the Finance Minister would imply a 40 billion rupee increase from the budgeted 360 billion rupees – a raise that needless to add is insufficient to meet the needs of the 33 million flood-affectees as well as the rising number of unemployed due to the massive envisaged decline in the country’s growth rate as evident from large-scale manufacturing growth registering in the negative arena though more recent data is still awaited; (iv) allowing the exchange rate to be market determined to gradually eliminate the foreign exchange shortage.
This is widely believed to be the reason behind the trust deficit between the Fund and the authorities and was the cause of considerable cost to the economy due to a subsequent fall in remittance inflows through official channels (around 2 billion dollars during the first seven months of the year) and exporters delaying bringing in their export proceeds due to the widening differential between the interbank and the open market rates estimated at another 2 billion rupees; and (v) enhancing energy provision by preventing further accumulation of circular debt and ensuring the viability of the energy sector. Or to end the flow or addition, to circular debt, to zero – a fact that would imply raising the tariffs though the finance minister stated that the government does not intend to raise tariffs for those using less than 300 units per month – a pledge that he may not be able to keep.
And finally, the Fund statement stipulated that “timely and decisive implementation of these policies along with resolute financial support from official partners are critical for Pakistan to successfully regain macroeconomic stability and advance its sustainable development” – a stance that no independent economist, domestic or international, can criticise or challenge, given the existing economic impasse.
The days of borrowing without implementing reforms are over and the economic team must accept that neither friendly countries nor multilaterals are willing to throw good money into bad economic policy decisions.
Copyright Business Recorder, 2023