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Caretakers must ensure fiscal discipline

The last official document on the state of the economy prior to the end of the tenure of the eleven-party coalition government was uploaded on the Finance Division website on 1 August titled ‘Economic Update and Outlook July 2023’. There is a disconnect between the report’s assertion that the “the government’s stern decisions and stabilisation measures have steered the country towards a sustainable path” and the cited macroeconomic indicators.

This disconnect is entirely attributable to implementation of flawed economic policies that violated the mid-August 2022 staff level agreement with the International Monetary Fund (IMF) on the Extended Fund Facility (EFF) programme’s seventh/eighth review with the last tranche under the programme disbursed on 2 September 2022. Pakistan’s economy in general and the general public in particular paid a very heavy price for the induction of Ishaq Dar as the finance minister on 27 September 2022 till 27 June 2023 when the then Prime Minister, Shehbaz Sharif, directly interacted with the Managing Director of the IMF to secure a staff-level agreement (SLA) on the Stand-By Arrangement (SBA) to avert the looming threat of default.

Dar’s policy transgressions emanate not only from his lack of exposure to economics as an academic discipline but also his insistence that his policies were efficacious in the past, a claim that shows he is not aware of the time lag between policy implementation and its fallout. A case in point is his decision to control the rupee-dollar parity during 2013-17 and the resulting 20 billion-dollar current account deficit in 2018 – the highest in the country’s history. He compounded these shortcomings by making false claims in parliament: (i) all EFF conditions were met in February 2023; and (ii) the country never faced the prospect of a looming default as all external payments due (interest and principal as and when due) were being made.

These two claims were refuted not only by his boss, former Prime Minister Shehbaz Sharif but also by the IMF. Shehbaz Sharif stated repeatedly on record that the SLA on SBA averted the prospect of a looming default, a statement supported by those engaged in negotiations on the ninth review and independent economists.

The IMF website cites Julie Kozack, Director Communications Depart-ment, as stating on 13 July 2023, the day after the SBA was approved by the Board, that it “is aimed at supporting the authority’s immediate effort to stabilize the economy” and to ensure “that the new program will anchor the authorities’ immediate efforts to stabilise the economy”. The emphasis on the word ‘immediate’ explains the disconnect between the claim and the accompanying macroeconomic data in the July 2023 Update and Outlook: it is only after implementation of SBA’s prior conditions including a revision of the 9 June budget presented to parliament that can possibly justify the claim that “stern decisions” were taken though the country has yet to embark on a sustainable path as there is a time lag between policy implementation and the outcome – a time lag that may require to be calculated in years rather than days or months as it is proportional to the state of the economic impasse the country faces today.

The most damning indictment by the IMF of Dar’s persistence to implement the flawed policy of controlling the interbank rate is noted in the SBA documents: “external pressures escalated in FY23H1 as foreign inflows came to a standstill and scheduled debt service drained reserves to critically low levels. Without the ability to formally intervene in the FX market, informal efforts began in the Fall, including moral suasion on banks, to nudge the exchange rate to appreciate. When this did not succeed, import-payment restrictions and a crawl-like behavior from October 2022 through end-January 2023 fueled pressures in the FX interbank market, exacerbated the scarcity of dollars, allowed the FX black market to grow (with a rising informal premium), and caused disruptions in the timely import of key inputs for domestic production and exports. After reserves declined to about 3 billion dollars (half month of import coverage) in mid-January 2023 the exchange rate was allowed to depreciate by almost 10 percent on January 26. However, the normalization in the FX market was short-lived, with premia reemerging in February (amid a notable appreciation) and again from May onwards on the back of import restrictions (while price movements in the interbank market remained minimal).”

Two observations are pertinent in this regard. First, it belies Dar’s repeated claim that all IMF conditions were met since February 2023. The Fund rightly claims that the decontrol over the exchange market was short lived – for days, not even weeks. Dar’s insistence can be viewed as an under-estimation of others’ capacity to read what is written on the wall in bold letters.

Second, the Fund refrained from setting a value “on the rising informal premium” (indicated by the decline in remittance inflows through official channels of 4 billion dollars in comparison to the year before) and on “disruption on the timely import of key inputs for domestic production” that no doubt contributed to the negative 0.5 percent growth rate in the outgoing year which, in turn, fueled unemployment pushing thousands of families under the poverty line.

Dar is no longer in the picture however the second lead member of the economic team, Governor State Bank of Pakistan Jameel Ahmed remains. IMF’s assessment of the performance of the SBP during the Dar years, notwithstanding the autonomy bill passed by parliament in January 2022 – a Fund condition for the SLA on the sixth review under the EFF, is not salutary: “despite the mounting pressures, actions by the SBP lacked clarity, as it kept its policy rate unchanged in Monetary Policy Committee meetings in August, October, and early June, expecting that the price rises had peaked and would subside, but hiked rates in November, March, April, and late June.” The last hike brought policy rates to 22 percent regarded correctly as a prior condition of the IMF under the SBA. It is hoped that without Dar the SBP may take monetary policy decisions that are more appropriate. To conclude, the caretakers, Finance Minister as well as Advisor to the Prime Minister on Finance, would have to abide by the conditions agreed in the SBA (in case of a shortfall in the target revenue to make appropriate adjustments (maxing the petroleum levy to 60 rupees per litre already legislated by parliament or through statutory regulatory orders if needed, as only parliament can approve new taxes), or privatize state owned entities though the investment climate remains dour due to poorly performing indicators, or receive the pledged foreign investment from friendly countries (with optimism at an all- time peak in this regard) though in the past such pledges have not materialised due to poor investment climate and/or the insistence by the foreign investor to be granted extraordinary fiscal and monetary incentives.

Anjum Ibrahim, "Caretakers must ensure fiscal discipline," Business recorder. 2023-08-21.
Keywords: Political sciences , Foreign investment , Monetary incentives , Monetary policy , Growth rate , Macroeconomic data , IMF

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