EDITORIAL: The International Monetary Fund (IMF) uploaded documents on its website relating to the agreement reached under the 3 billion dollars Stand-By Arrangement (SBA) with harsher upfront conditions as opposed to the suspended Extended Fund Facility (EFF) programme indicated by the warning that “immediate efforts to stabilise the economy” are required.
This was followed by yet another damning indictment of flawed economic policies that were violative of the pledges made in August last year, subsequent to Ishaq Dar’s appointment as the country’s Finance Minister on 27 September 2022, with two of the four key policy pillars directly attributable to his “missteps”: (i) an appropriate budget for the current fiscal year which led to a revision of 9 June budget to the one finally approved on 23 June; and (ii) a return to the market determined exchange rate – not defined as a rate set in the open market but a rate that allows the State Bank of Pakistan (SBP) to determine a range that takes account of key macroeconomic fundamentals, including foreign exchange reserves, current account balance, etc.
Dar’s critics also hold him responsible for the third pillar cited by the IMF that was violated due to his inordinate influence on the SBP (in spite of parliamentary approval of the passage of greater autonomy to the apex bank in January 2022) notably an appropriately tight monetary policy aimed at addressing inflation.
The Fund refers to the lack of clarity by the SBP as it kept its policy rate unchanged in Monetary Policy Committee meetings in August, October and early June but hiked rates in November, March, April and last June. The lack of clarity, it is alleged, is attributable to influence from the government.
Be that as it may, while adjusting the policy rate has little effect on inflation in Pakistan mainly because the single largest borrower remains the government, and a rise in the rate raises debt servicing costs, thereby raising the budget deficit, a highly inflationary policy, yet, it perhaps, reflects the failure of the incumbent economic team leaders, as of the past, to convince the Fund staff that this linkage is not pertinent.
The fourth and final pillar relates to the continued poor management of the energy sector with severe implications on the budget deficit and with 73 percent of sovereign guarantees (2.54 trillion rupees in total terms) required to keep the sector afloat.
The SBA documents note that the power and gas sectors’ financial viability led to “unsustainable spillovers onto the budget,” and urged the government to ensure timely alignment of energy tariffs with cost structures as per Nepra’s (National Electric Power Regulatory Authority’s) and Ogra’s (Oil and Gas Regulatory Authority’s) formulae (while protecting the vulnerable) and to implement reforms to reduce operational, generation and Circular Debt-related financial crisis in line with the current power and emerging gas Circular Debt Management Plan (CDMP) to put tariffs on a downward trajectory.”
In short: Increase the tariffs as recommended by the regulators for now and seek downward tariffs subsequent to the implementation of the CDMP. There is a heavy cost associated with all four violations that is to be borne by the people of this country amounting to over 4 to 5 billion dollars in lost remittances, thereby leaving the only option open to stave off looming default: a return to the IMF.
The Fund documents further note that the new programme will “build on the recent Extended Fund Facility (EFF) programme and help address its balance of payments needs by supporting the needed adjustment, bolstering confidence and catalysing multilateral and bilateral financing.”
Two prevailing factors inhibit a meaningful analysis on how much of the build-up on EFF is manifest in the SBA. First and foremost, the Fund documents note that “incomplete and uneven policy implementation under the EFF was a missed opportunity to set the economy on a sounder footing and help Pakistan avoid the cost of yet another economic crisis.”
In short, there was a visibly evident shortfall in all macroeconomic projections made in the seventh/eighth review of the EFF dated mid-August 2022 and hence all SBA programme conditions are considerably harsher on the common man.
The following examples should be a source of concern to the economic team leaders: FBR revenue was projected at 8.65 trillion rupees for the current year that was raised to 9.4 trillion rupees in the IMF approved revised budget for the current year; external financing needs were projected at 1.38 trillion rupees in August last year which have been raised to 2 trillion rupees under the SBA, and domestic financing needs noted at 2.45 trillion rupees under the EFF have been raised in the SBA to 6.2 trillion rupees or an economy even more heavily indebted than was projected by the Fund in August last year.
What is also relevant to note is that the Fund Staff recommended that the SBP should accelerate the recapitalization process by strengthening bank resolution and crisis management frameworks through expediting a draft law currently under discussion in the cabinet.
While there is no mention of the lack of appropriate action to-date, pledged by the SBP, against the six banks found guilty of currency speculation last year that upped the rupee-dollar parity, yet one can only hope that the process to do so is underway.
And second, and equally disturbing, is that while the overall fiscal balance was projected at negative 4.1 percent for the current year provided the IMF prescriptions been followed last year was upped to negative 7.5 percent for the current year, a highly inflationary policy.
What is, however, extremely disturbing is that the Fund agreed to a current expenditure rise from the EFF’s target of 13.86 trillion rupees to 19.23 billion rupees under the SBA – a rise which may have been politically expedient but is certainly not viable from the common man’s perspective who will now pay a high price in terms of spiralling inflation and an erosion in the value of each rupee earned.
Raising Benazir Income Support Programme from 408 billion rupee (9 June budget) to 466 billion rupees (27 June budget) is unlikely to achieve the objective of reaching out to the increasing numbers being pushed below the poverty line (with negative 0.5 percent growth last year) which no doubt led the Fund to urge “sustained efforts to increase the generosity of BISP stipends and ensure enrolment of all deserving families.” To achieve this salutary exhortation would require massively curtailing current expenditure and setting a limit to government borrowing – domestic and foreign.
The report further notes that the international reserves were replenished to 4.2 billion dollars by late June on the back of support from key bilateral partners – support, that the country’s economic managers must realize, came subsequent to reaching the staff level agreement with the IMF on 29 June 2023.
Risks associated with the implementation remain exceptionally high – upped from high in the August 2022 documents, which is again a reflection of the poor handling of the economy post the last disbursement under the EFF on 2 September 2022.
The Fund held discussions with the leadership of all three major national parties and in the SBA document refers to pledges by all three to adhere to the programme conditions or a “broad recognition that Pakistan needs to remain engaged with the Fund and other international partners...the difficult socio-political climate, including persistent political volatility remains a key risk to policy implementation, which could undermine Pakistan’s adjustment path and; growth potential.”
While this does not quite reflect the political ground realities in Pakistan today, though in defence of IMF one has to acknowledge that it has no history of being able to assess the political factors in play at any given time, yet it is also relevant to note all the three national parties violated the Fund programme’s conditions that they were signatory to and hence mere pledges are not going to ensure implementation.
The fact that bilaterals stood firmly behind the Fund and did not release pledged rollovers/new loans till the staff level agreement on the SBA was reached, one would hope, convince all future finance ministers, revolving or one hopes with no history of failure, that without structural reforms the country will face the prospect of default.
Copyright Business Recorder, 2023
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