Reading IMF’s 9th review
The lady luck is with the government in the form of decade low oil prices and China’s investment package. This, along with leniency of the IMF owing to favourable geopolitical conditions for Pakistan, is painting a rosy picture of the economy. However, after removing the icing from the top, the pie is not well baked and the need to have structural reforms is of utmost importance for sustainability of the economic stabilization. Otherwise achieving high growth momentum will remain elusive.
Looking through a magnifying glass, the IMF’s ninth review is exhibiting a tainted picture. Two of the five quantitative targets were missed in the September 2015 review – the ceiling of NDA of SBP and the ceiling on overall budget deficit. These were the most important targets and for NDA even the juggling on numbers and revision by IMF were not enough for government to pass.
Third target has been achieved after some generous adjustment by the fund – floor on NIR of SBP – as original target was revised down from $8,300 million to $6,885 million; only the fourth target is met comfortably (ceiling on net government borrowing from SBP) as fiscal authorities are conveniently shifting the debt burden on commercial banks at exuberant rates. However, that move not only risks crowding out the private sector credit but also the shortage in liquidity is constantly pumped by SBP, which defies the very purpose of the target – OMO injections are unprecedented persistently staying north of trillion rupee mark. Fifth target is not worthy enough to discuss.
The most important indicative target of FBR revenues were missed by Rs40 billion to stand at Rs600 billion in the first quarter. That had antagonized fund and caused jitters in the Ministry of Finance to come up with a mini budget to meet the shortfall.
Fast forward and let us move to December end. A few of the quantitative targets are either not met or the lenient behaviour of IMF would allow adjustors to achieve the targets. Let’s evaluate them one by one. In the case of floor of NIR, the target mentioned in the fund’s ninth review is $9,300 million which hasn’t been revised from the previous review. However, the target of Sep-end was revised down from $8,300 million to $6,885 million, while the actual number was $6,955. Now the gap of $2,345 million ($9,300mn minus actual $6,995mn) is too big as SBP’s reserves (minus IMF’s tranche) were increased by meager $150-200 million in the second quarter. And SBP is reportedly not buying dollars in the market during second quarter to keep the rupee from depreciating.
Has the NIR target for Dec-end been missed? Well, first the fund will extend the adjustment for first quarter to the second (Sep end NIR target revised down by $1,415) and by this virtue NIR target will be revised down to $7,885 but still the gap will be $600-700 million and even after CSF adjustor ($175mn was expected in second quarter which didn’t materialize), there will be a gap of at least $400 million. Hence, NIR in all likelihood will be missed for tenth review (Dec end review).
The second target is ceiling of NDA of SBP. It has revised up from Rs2,350 billion to Rs2,580 billion and after some last day window dressing, the number for Dec-end was Rs2,574 billion. Congratulations to MoF and SBP for meeting this target.
The third target of ceiling of overall budget deficit is tricky. FBR performed exceptionally well in the second quarter yet the indicative target of Rs1,390 billion for Jul-Dec was marginally missed as FBR collected Rs1,385 billion in the first six months. But the bigger problem is the shortfall in non-tax revenues and overrun of development expenditure and by summing up all, fiscal deficit ceiling of Rs625 billion might not have been achieved in Jul-Dec.
The government collected Rs213 billion in non-tax revenues in Jul-Sep and IMF’s projections for second quarter were Rs204 billion. The government received CSF money of $713 million (Rs75bn) in the first quarter and it was budgeted at $175mn (Rs18bn). Thus, non-tax revenues are short by Rs18 billion or the number could be even bigger.
There are some cost overruns on Prime Minister’s relief package for farmers and estimated spent was Rs30 billion in the second quarter (against the announcement of Rs40 billion). The expenditure on defence was extraordinary low in the first quarter and there might be some higher allocation in the second quarter; but creative accounting in the form of delaying payments by a few days could have kept military related expenditure within limits.
But the most important element is higher PSDP allocation in the second quarter. The IMF is pressing the government to run a tight fiscal policy to keep the deficit down but PML-N government is eyeing on its manifesto and looking to build credibility for next election by increasing the releases of PSDP. The government has released Rs270 billion in federal PSDP till Dec-end while it has promised to the fund that the spending would be of Rs182 billion. This makes a shortfall of Rs88 billion. Although, BR Research is for pro expansionary fiscal policy as public developmental spending is in line with pro-growth strategy verbalized in the budget speech by Finance Minister, the same should be achieved with efficiency to avoid wasteful expenditure.
Nonetheless, cumulative fiscal slippages (both revenue and expenditure) may come around Rs140 billion. Hence, fiscal deficit target may be missed by a large margin. Despite higher fiscal deficit, the government borrowing from SBP remained well within the limit (Dec end) as the onus of domestic borrowing continued on commercial banks during the second quarter.
This is the brief report card clearly showing dismal performance in the quarter ending December 2015. The fate of the structural benchmarks is no different as no meaningful fiscal reforms have taken place and SBP autonomy or monetary policy independence is only showing on papers. The deadlines of privatization plans or restructuring companies are kept on lingering – virtually timelines are extending in every review and now most of the plans have deadlines ranging from June–Dec 2016 and the programme is terminating in August with June being the last review. What does this imply? Yes, the programme will be completed successfully with number of waivers in quantitative targets and structural benchmarks hanging in air with a hope that government will assume its responsibility independently.
