EDITORIAL: A statement issued by the Ministry of Finance has revealed that the economic team led by Finance Minister Ishaq Dar held a virtual meeting with the International Monetary Fund (IMF) team headed by Jihad Azour, Director of the Middle East and Central Asia Department that processes loans to Pakistan.
A tweet by the Ministry of Finance contended that “they discussed progress on IMF program and implementation of prior actions. Azour expressed confidence that SLA (staff-level agreement) is expected to be signed soon to be followed by the Board’s approval for the ninth review.”
The Ministry of Finance in general and the Minister of Finance in particular have been consistently overly optimistic about the SLA being imminent since the departure of the Fund’s 9th review mission on 10 February 2023, in spite of the fact that the Mission’s press release at the time stated explicitly that “this mission will not result in a Board discussion.”
More than two months later the 9th review remains pending though no one reckons that the SLA will not be reached for two reasons: (i) all politically challenging prior conditions including a mini-budget, upgrading utility rates and petroleum levy have been met; and (ii) the pledges from the three friendly countries – China, Saudi Arabia and the UAE – have been met/restated though the formal intimation to the Fund by the UAE is still awaited.
However, Azour did not deem it appropriate to upload a press release on the Fund’s website confirming that a meeting was held with Dar virtually and, more importantly from the perspective of our markets, that he was confident that the SLA would be signed soon – a lapse that has fuelled speculation that the prior actions agreed during the Fund mission (1 to 9 February 2023) may require additional measures as the economic slide has exacerbated since then – in terms of growth forecast that would upset revenue projections, the increased reliance on domestic borrowing to fund current expenditure that is increasing inflation and last but not least the continuation of forex remittance restrictions even though there has been considerable exchange rate flexibility when compared to earlier (before 27 January 2023) when the rupee’s external value was controlled.
And while the government’s claim that it has satisfied the Fund team on its decision to provide cross-subsidy on petroleum products, whose mechanism is still awaited, yet questions will remain till the SLA is reached.
The prior actions were all inflationary and if one adds the fact that the government’s current consumption has risen dramatically in recent months, with the policy rate at a high of 21 percent and still not reflecting a positive rate of return given the consumer price index of a little over 27 percent in March, ever-rising farm to market transport costs due to the petroleum levy and last but certainly not least the devastation wrought on our agricultural sector due to the floods last summer one can conclude that the reasons for inflation are not entirely attributable to the Fund programme.
In this context, the World Bank’s revelation that food inflation has been on the rise in Pakistan for 11 consecutive months and is a close second at 47.2 percent to Sri Lanka’s 47.6 percent, is disturbing as one is forced to acknowledge that the major point of departure between the two countries is that while the 9th review remains pending for Pakistan the Fund’s programme is signed and running in Sri Lanka.
In September last year, inflation in Sri Lanka was as high as 70 percent and while negotiations on the Fund programme for 2.9 billion dollar Extended Fund Facility came to fruition on 20 March 2023 yet prior conditions were met earlier accounting for a steady decline in inflation.
It is important to note that the Sri Lankan programme bears remarkable similarities to the ongoing programme in Pakistan approved in 2019 as it required assurances from bilateral creditors - a press briefing by three major Sri Lankan bilateral debtors is scheduled during the ongoing Spring World Bank/IMF - that they will provide debt relief to restore debt sustainability as well as “a multi-pronged strategy to restore price stability and rebuild reserves under greater exchange rate flexibility in order to alleviate the burden of inflation.”
Some independent economists argue that without the Fund programme Pakistan’s inflation would be higher by at least 10 to 15 percentage points, however, the focus of the Fund is on factors that may be critical in economic theory in developed economies but not as critical in Pakistan as regards their contribution to inflation in general and to provide relief to the poor in particular.
First off, manipulation of the policy rate to check inflation merely stifles private sector activity with a consequent negative impact on growth and employment levels while each successive government has borrowed heavily to spend on current expenditure, which not only fuels inflation but also the budget deficit with ever-rising debt service payments.
What this country needs is to massively slash current expenditure but instead the Fund’s focus is on raising revenues with the government relying on low-hanging fruit or indirect taxes (currently accounting for over 71 percent of all collections) whose incidence is greater on the poor than on the rich.
To increase the Benazir Income Support Programme (BISP) by around 40 billion rupees as part of the negotiations with the Fund is money that is too little given the rising number of jobless and the rising prices of food.
The Fund, therefore, needs to develop country-specific programmes or detailed rules specific to a country or group of countries.
Copyright Business Recorder, 2023