A Business Recorder exclusive citing high-level sources in the Ministry of Finance maintains that the staff level agreement on the second quarterly review with the International Monetary Fund (IMF), mandatory for the tranche release under the 6 billion dollar Extended Fund Facility programme approved July 2019, remains stalled due to politically challenging ‘prior’ conditions. The question that arises is whether these severely contractionary policies are doable in Pakistan today given the fact that the country is currently grappling with the second wave of Coronavirus.
The staff-level agreement signed on 12 May 2019 between the IMF and the government’s economic team leaders envisaged severe contractionary monetary and fiscal policies. The monetary policy contraction was evident from a discount rate of 13.25 percent (at a time when global rates were tumbling to near zero levels) that effectively choked off economic activity leading to massive lay-offs and a rupee depreciation that propelled the real effective exchange rate calculated by the SBP from the high of 121 in June 2017 to a low of 94 in September 2020. Fiscal policy envisaged tax revenue collection of an unrealistic 5.5 trillion rupees in 2019-20 and an equally unrealistic 4.9 trillion rupees in the current fiscal year. Failure to achieve the tax revenue targets, blamed unfairly entirely on the pandemic, accounts for the distinct possibility that the government would be unable to achieve the revenue targets yet again this year which, in turn, would not only increase the budget deficit with a consequent negative impact on inflation but may also compel the government to levy higher taxes.
These two policies agreed with the Fund last year led to a 13 percent projection of inflation by the IMF, against the then rate of around 6.5 percent, which is the root cause of considerable public angst today. The inflation today is under 10 percent however its impact on the poor is all the more because food inflation has risen to over 14 percent while not being buttressed by a raise in salaries, due again to IMF conditions. Sector reforms envisaging full-cost recovery for the energy sector have relied on raising tariffs rather than improving performance of the sector, thereby the stress on eroding incomes is all the greater. And last but not least, notwithstanding the contribution made by Dr Ishrat Hussain as the Advisor to the Prime Minister on institutional reforms these remain pending with little improvement evident in governance in any sector/sub-sector.
The question as to why the Fund levied such upfront harsh conditions has been repeatedly raised by Business Recorder and one would be compelled to acknowledge that in Pakistan reforms agreed with the Fund in the past were mostly abandoned mid-way or reversed as soon as the country went off the Fund programme. In this context one would also hold the Fund responsible for the last programme design as it allowed the then Finance Minister, Ishaq Dar, to overvalue the rupee to such an extent that the country is still reeling from the aftermath of such a patently flawed policy decision that led to a historic high in the current account balance.
Disturbingly, however, the design of the current Fund programme can be challenged on two counts. First and foremost, last year the honeymoon period of the newly-installed Khan administration was underway and the populace bore the harsh upfront conditions. However today the honeymoon is clearly over and there is a need for some ‘give’ as far as the IMF is concerned, or, else there is a danger of social unrest spilling onto the streets.
To implement a further raise in the ongoing contractionary policy measures (given the current 7 percent discount rate is higher than the core inflation by around 2 percentage points as well as the regional average and the budgeted tax revenue target remains unrealistic) further upfront contractionary policies as Pakistan grapples with the second wave of the virus would be political suicide for any government. Ironically, while the Fund supports spending in the developed countries suffering a second wave of the virus it is proposing the exact opposite in Pakistan – a stance that brings its programme design into serious question.
At the same time one would urge the Prime Minister to acknowledge two major impediments in the way of an economic recovery. First, by slashing Public Sector Development Programme (from 701 billion rupees last year to budget 650 billion rupees this year), a key driver of growth in this country which, in turn, can raise the tax revenue collected, growth is expected to remain stalled. True that Dr Hafeez Sheikh in the budget 2020-21 has forecast a growth of 2.1 percent yet no one, not multilaterals who have projected a growth rate half that or independent economists, support this projection. And secondly, irrespective of claims to the contrary and in spite of reducing the budgeted outlay on the Prime Minister and the Presidency the fact remains that savings have been small and the current expenditure has only declined by the amount of debt deferral allowed by the rich countries till the end of the year due to the pandemic. Total domestic markup has been budgeted to rise by 10 percent (in comparison to revised estimates of last year), pensions by 1.5 percent, and running of civil government by nearly 7 percent notwithstanding the claim that salaries were not raised this year.
To conclude, one would hope that the government’s economic team leaders negotiate better than they did last year and be made to understand by the political leadership that if the IMF conditions are agreed in their entirety today it would have serious political consequences.
