EDITORIAL: The staff-level agreement (SLA) on the first review of the nine-month 3 billion dollar International Monetary Fund’s (IMF’s) Stand-By Arrangement (SBA) was reached on Wednesday as expected – an expectation based on the continued implementation of three politically challenging conditions.
First, the extremely unpopular administrative but economically sound decision to raise utility tariffs with a view to achieving full cost recovery, (electricity and gas). Second, to ‘return’ as opposed to continue the policy of a market-determined exchange rate.
In this context, it is relevant to note that the rupee had continued to strengthen after the crackdown on currency speculators was launched on 7 September 2023 but weakened after when the State Bank of Pakistan (SBP) disallowed forward cover to exporters on 30 October – the date of SBP decision, perhaps coincidentally, only four days prior to the start of the scheduled SLA talks with the rupee weakening every day since then.
The mission’s press release couched a warning in diplomatic language, “while inflows following increased regulatory and law enforcement helped normalise import and foreign exchange payments and rebuild reserves, the authorities recognise that the rupee must remain market-determined to sustainably alleviate external pressures and rebuild reserves.
To support this they plan to strengthen the transparency and efficiency of the foreign exchange market and to refrain from administrative actions to influence the rupee.” And, tellingly, the press release under the subhead proactive monetary policy highlights ‘the authorities pledge to respond resolutely if near-term price pressures re-emerge, including the second-round effects on core inflation or renewed exchange rate depreciation.’
Sadly, the authorities failed to convince the Fund that discount rate adjustment has little linkage to inflation in this country and any rise in the rate merely reduces private sector borrowing with severe repercussions on productivity, unemployment – elements that account for the poverty rate rise to 40 percent.
Thirdly, the press release does not illuminate on the chicken-and-egg question notably does the onus of ensuring the budgeted external inflows rest entirely with the Fund, given that this is not clearly stipulated in the SBA documents unlike the previous Extended Fund Facility programme documents, or does the entire onus rest with Pakistan authorities.
The press release notes that a nascent recovery is under way buoyed by international partners’ support but while the ‘authorities have accelerated the engagement with multilateral and bilateral partners timely disbursement of committed external support remains critical to support the authorities policy and reform efforts.’
Disturbingly, the issue facing the authorities today is the decision of the rating agencies not to upgrade Pakistan after the SLA was reached on the SBA on 29 June 2023, as was the usual practice in the past subsequent to IMF programme approval, which, in turn, is jeopardising access to external market financing (borrowing from commercial banks abroad as well as issuance of sukuk/eurobonds to the tune of 6 billion dollars).
This is noted but perhaps purposely submerged in the following statement, “Pakistan remains susceptible to significant financial risks, including the intensification of geopolitical tensions, resurgent commodity prices and the further tightening of global financial conditions.” Perhaps greater clarity will be provided in the detailed documents that would be released subsequent to Board approval however this must be a serious concern for Pakistan’s economic team.
The 14 November IMF press release refers to the need for continued fiscal consolidation and the same day, promptly and rather propitiously, the Cabinet approved the levy of 40 percent tax on banks’ windfall profits which they earned from foreign exchange transactions in 2021 and 2022.
In this context it is relevant to note that an investigation that provided its findings a year ago, held eight banks culpable of currency speculation mid-2022 and the then economic team leaders, including the incumbent Governor SBP, publicly stated that either a direct penalty or fiscal measure (windfall tax) is being considered.
While it took a long time to take this decision yet one would assume that this was part of the agreement with the Fund as the press release notes under the subhead building financial sector resilience that “continued vigilance is warranted to safeguard the soundness of the banking system. Priorities include addressing undercapitalized financial institutions, ensuring foreign exchange exposures within regulatory limits, aligning bank resolution and crisis management frameworks with best practice.”
The Fund refers to social protection allocations, budgeted at a third higher than in the year past, and while this sounds good the fact remains that the per beneficiary disbursement today for three months is not sufficient to meet even one week’s kitchen budget of a family of four.
And finally, the Fund obviously briefed on the newly created Sovereign Wealth Fund and operations of the Special Investment Facilitation Committee (SIFC) noted the application of “high governance and transparency standards” - though it is unclear whether this is an exhortation or simply part of the briefing.
To conclude, Fund staff’s experience with Pakistani authorities during the previous 23 programmes, with implementation of agreed conditions weak specially pertaining to politically challenging reforms in the power and tax sectors, the emphasis throughout the press release issued by the mission leader is on ‘continued fiscal consolidation’, ‘further reforms to reduce costs’, ‘proactive monetary policy’, ‘building financial sector resilience’, and ‘continuing state-owned enterprise and governance reforms to improve business environment, investment and job creation’.
The economic ship may have sailed as per the Fund’s press release, but it is far from having reached its destination.
Copyright Business Recorder, 2023