The uploading of the International Monetary Fund (IMF) staff report on its website this week past highlights two major thrusts of the thirty nine-month Extended Fund Facility (EFF) that are not in conformity with past programmes and whose impact is being felt by the general public as opposed to the government a mere two months after the front-loaded staff level agreement was reached on 12 May 2019, and two weeks after the budget became operational: (i) quasi deficit reduction rather than fiscal deficit reduction accounting for a slowing down of private consumption with businesses, commercial and industrial, scaling down operations, while government consumption is budgeted to rise significantly; and (ii) relying on tax collections/revenue generation to achieve debt sustainability with, again, obvious negative implications on disposable income, prompting the staff level report to warn that “fiscal slippages and resistance to some of the fiscal measures could undermine the programme’s fiscal consolidation strategy, thus putting debt sustainability at risk.”
The IMF rationale has merit-based on three rather obvious lessons learned from its previous two programmes (2008-10 suspended due to failure to meet the agreed conditions and 2013-16 completed though the fiscal deficit gain was reversed within the year): (i) Pakistani administrations largely adhere to the deficit targets set by the IMF however when the country is no longer on the programme the budget deficit quickly reaches unsustainable levels; (ii) previous administrations did not follow through with pledges on dealing with structural reforms in the tax and energy sectors due to their obvious negative political fallout; and (iii) a phased approach instead of front loading with respect to implementation of time-bound structural benchmarks has not been successful as previous administrations constantly requested deferrals of tranche release conditions failing which they opted for programme suspension.
Thus the ongoing EFF focuses on quasi deficit reduction premised on the rationale that if the energy sector circular debt and issues relating to unsustainably high receivables are resolved (be they due to poor management, high transmission losses, high costs of generation companies relative to cheaper sources of fuel or indeed due to theft) the energy sector circular debt of around 1.5 trillion rupees would no longer be an issue requiring unbudgeted injections. The policy measures to deal with this are similar to those proposed in the previous two programmes and include a raise in tariffs, notification of tariff for 2020 as determined by Nepra, the regulator, without any political intervention, preparing a time-bound action plan to reduce the stock of the circular debt also payable by the consumers, and amending the Nepra Act to ensure the regulator’s complete autonomy. Raising tariffs impact directly on peoples’ incomes as well as on the productive sectors ability to compete internationally and in the domestic market (with smuggled goods available given our large porous borders). However while Minister Umar Ayub claims to have reduced theft through revenue based load shedding, a policy that was launched by the previous administration, yet, disturbingly, there are no indications that management has improved.
The IMF staff report factored in risks to the programme, a two and a half page exhaustive list, ranging from external (Financial Action Task Force may possibly black list Pakistan) to internal risks including the ruling party’s absence of a majority in the upper house which would hinder the adoption of legislation, relating to pending and proposed new legislation in the staff report. But most importantly the IMF staff notes the risk posed by “the authorities’ upfront efforts, exchange rate flexibility, fiscal consolidation and tariff adjustments in particular, maybe received with strong backlash from vested interests and the wider population as the benefits may not be immediately obvious.” The strong backlash from vested interests is apparent today with threats of strike action however the more politically serious backlash from the wider population is not yet apparent though mumblings of distress can be heard clearly with their tempo rising almost every day.
Had the programme design included deficit reduction as well as quasi deficit reduction and higher revenue it is possible that these rumblings may have remained muted. Disturbingly the haves as opposed to the have-nots have been allowed to increase current expenditure by 27 percent (if Hafeez Sheikh’s decision to relocate the Ehsaas programme under current expenditure from development expenditure outside public sector development programme is taken out of the equation) while development expenditure has been raised by 29 percent. This is certainly not what an austerity budget looks like notwithstanding sacrifices made by the military and civilian establishment and the Prime Minister’s directives to all ministries to reduce expenditure.
The government, and the IMF report, constantly emphasizes two components of the budget that would stay the public discontent: (i) subsidizing those who use electricity up to 300 units per month (216 billion rupees kept aside for this purpose). However 300 units are enough to run a couple of fans and a light or two and an iron and use of any other electrical appliance would raise the units to beyond 300. The majority of low income and lower middle income groups, with a television, would therefore not be eligible for the subsidy; additionally the consumer price index places 34.8 percent weight on food and 29.41 percent weightage on housing, water, electricity, gas and fuels. The recently unemployed, the low and lower middle income earners use upward of 95 percent of their entire income on these items alone. Or the effect of a lower inflation rate, due to State Bank of Pakistan’s discount rate upward adjustments (as per EFF condition), may not be felt by these groups pushing them under the poverty line; and (ii) Ehsaas programme is a little over 200 billion rupees, and given that Benazir Income Support Programme (BISP) has been subsumed in this programme, the actual allocation has not doubled as claimed by Sheikh as BISP was allocated 118 billion rupees last year and falls short by 36 billion rupees.
For the next 11 and a half months’ growth is projected at 2.4 percent, inflation at 13 percent, private sector credit is set to decline with lay-offs already in small and medium business enterprises (auto mechanics/servicing air conditioners etc) so what can the common man expect during the current year? Stagflation, and in spite of IMF staff report’s claim that “continuous rollover of claims of non-traditional official creditors….(and their) firm commitments to maintain their exposure the underlying gross financing needs can be estimated to be lower by 1.3 percentage points of GDP on average per year during the programme and beyond the programme” access to additional funding would be a challenge which explains why Hafeez Sheikh gave as wide a margin as from zero to 8 billion dollars in reliance on commercial loans which would raise the short term debt profile.
To conclude, Hafeez Sheikh, flanked by Shabbar Zaidi and Hammad Azhar has failed to effectively address the general public’s rising genuine concerns relating to the erosion of their ability to feed their families; instead Sheikh has adopted a dismissive approach palming off queries on others. It is doubtful if a recently unemployed or one experiencing a decline in the purchasing power of the rupee he/she earns that has disabled him/her from meeting his family’s basic needs would be convinced to stay the programme course or else face the prospect of debt sustainability at risk.
Copyright Business Recorder, 2019Anjum Ibrahim, "IMF programme design and public," Business Recorder. 2019-07-15.
Keywords: Economics , Economic policy , Extended Fund Facility , Fiscal deficit reduction , IMF program , Revenue generation , Budget deficit , Political intervention , Hafeez Sheikh , EFF , BISP , GDP