Pakistan is a perennial borrower of the International Monetary Fund (IMF) reflected by the fact that in our 72-year history the ongoing programme is the 23rd with an average duration of 3 years each (the current one is for 39 months), though not all were completed, accounting for more than 69 years.
One of the risks highlighted by the IMF staff in the Programme Risks section of the uploaded documents for the ongoing 6 billion dollar Extended Fund Facility (EFF) programme for Pakistan is that "key elements of this programme seek to break from the past recurrence of policy slippages," by "upfront adoption of key policy measures." In other words, the implicit assumption is that had the reforms agreed during the 22 previous programmes been completed in letter and spirit Pakistan would have graduated away from its perennial reliance on IMF bailout packages.
This arrogant mindset, that the Fund has the precise economic prescriptions necessary to turn any economy around, has been challenged by critics of the Fund's standard normal conditions including former high level Fund staff who resigned in protest and at least one Nobel laureate - Jo Stiglitiz; and this mindset continues to be challenged to this day backed by a dearth of cogent examples of IMF programmes success stories.
The Fund emphasizes that upfront "greater exchange rate flexibility" is a "testament of the authorities' commitment to reform." Exchange rate is the domain of the SBP. It depreciated the currency at a time when the rupee was already under valued by about 3 percent; today the under valuation stands at around 6 percent. The consequences are dire indeed: import compression, which can be supported, however there has been a contraction of imports of raw materials and semi-finished products (contributing to negative 7 percent growth in the large scale manufacturing sector with obvious repercussions on downstream small and medium enterprises) and value of oil and products imports have risen with a very small percentage rise in exports.
The SBP's claim that exports have risen in volume reflecting a rise in output does not present a trend given that only exports of rice and sugar have risen due to China agreeing to purchase these commodities from Pakistan this year. In acknowledgement of the export sector's poor performance, Adviser to the Prime Minister on Finance Dr Hafeez Sheikh announced 300 billion rupees additional credit to exporters - with 200 billion rupees from commercial banks and 100 billion rupees from SBP - with interest payable by the government at 3 percent, and cash refunds instead of bonds which the market had refused to accept. SBP governor Dr Reza Baqir in a press conference the next day confirmed that SBP would make 100 billion rupees available to exporters from its profits (an amount which has been upped according to the changing narrative requirements of the two team leaders) and authorizing dealers to make advance payment up to 10,000 dollars for imports of raw material and spare parts, an amount that is appallingly low.
The overvalued exchange rate was the then finance minister Ishaq Dar's legacy during the previous IMF programme (2013-16) with the objective of understating the country's growing external indebtedness. The then IMF team was reminded numerous times in these columns of the disastrous consequences on the country's exports of an overvalued rupee but to no avail. The then IMF team leader acknowledged that the rise in reserves was mainly sourced to a rise in debt equity but never set a time bound structural benchmark to deal with this obvious flaw in policy. He footnoted a study in one of the mandatory quarterly reviews, ostensibly carried out by the IMF, giving a laughably wide range of between 5 to 20 percent of rupee's over-valuation. The people of our hapless nation paid for not only Dar's flawed policies, with IMF complicity, but continue to do so today, with a different set of economic managers and a different IMF team through an undervalued rupee.
Be that as it may, the first IMF quarterly review notes that "the external position is strengthening, underpinned by an orderly transition to a flexible, market-determined exchange rate by the State Bank of Pakistan."
Another major flaw of the current IMF programme is the fact that expenditure, current (including subsidies) and development, has been allowed to rise to an unprecedented level, while the onus of meeting the budget deficit has been placed on the hapless public by raising the budgeted revenue target to an unrealistic level. This does not take account of the fact that the government projected inaccurate data for last year (7.2 percent budget deficit as opposed to 8.9 percent) which formed the basis of the agreement with the Fund implying thereby that revenue shortfall would be even less than what independent economists are projecting for 2019-20. In this context it is baffling that the first IMF review noted that "budgetary revenue collections are growing on the back of efforts on tax administration and policy changes, and despite the ongoing compression in import-related taxes."
The Federal Board of Revenue has already acknowledged a 162 billion rupee shortfall during July-October, largely attributed to import compression; however with the rise in inflation, not matched by a pay raise in the struggling private sector this year and with higher utility charges (attributed to poor performance of the sectors particularly energy with continued reliance on borrowing with interest charges payable by the consumers) and rising cost of petroleum and products (partly due to rupee under valuation and partly due to higher taxes rather than to a widening of the tax net) the quality of life is rapidly eroding. The widening of the tax net which made it mandatory for the use of CNIC for all transactions above 50,000 rupees was first deferred for two months and more recently for another three months. It is unclear whether this would be implemented from 1 February or be deferred again after strike action by traders.
Little wonder then that Prime Minister Khan is now sold on privatization as the means to meet the financing needs of the government, but one would hope that he proceeds with caution as privatization is easily challengeable in both the arena of the courts and public opinion - a stance that he took repeatedly when he was in opposition.
It is these aspects of the programme design which raise the spectre of socio-economic unrest derailing the reform agenda and the upfront conditions therefore may contain the biggest risks associated with the programme not reaching its scheduled completion. The team leaders must also be aware that with the IMF a pat on the back is followed by a slap on the wrist and the first review press release stated that "the near-term macroeconomic outlook is broadly unchanged from the time of the programme approval, with gradually strengthening activity and average inflation expected to decelerate to 11.8 percent in FY2020. However, domestic and international risks remain, and structural economic challenges persist."
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