Pakistan will have the next tranche released under the 6.64 billion dollar Extended Fund Facility (EFF) and that reflects the International Monetary Fund’s (IMF) continued engagement (in contrast to complete support as claimed by Finance Minister Ishaq Dar) for implementing agreed time bound measures as well as structural reforms.
The sixth review report notes progress with particular reference to the rise in foreign exchange reserves that has been cited time and again by the Finance Minister as his major achievement reflecting international and domestic confidence in his policies. Reading between the lines of the sixth review report the following disturbing trends, disturbing for the IMF staff and for the general public, need to be highlighted: (i) the government has issued more external debt as part of its diversification strategy, the review admits, but adds that public external debt remains largely with official creditors as bonds and private creditors account for only 3 percent of the total – official creditors belie claims of an in-house reform agenda and make the country’s foreign policy subordinate to debtors demands; (ii) domestic debt is largely in local currency and is short term (over 50 percent) which is at rates considerably higher than the market rate belying Dar’s repeated comments that he is borrowing from abroad at 5 to 6 percent and retiring domestic debt procured at 12 percent; (iii) SBP purchased sukuk issued by the government on deferred payment basis from commercial banks and sold it to Islamic banks absorbing excess liquidity, a temporary measure to control net domestic assets (NDA): (iv) borrowing from SBP was below the end December ceiling by 86 billion rupees, in compliance with IMF prior condition for tranche release, due to sukuk issue, ample treasury bills and Pakistan Investment Bonds and outright sale of SBP holdings of government securities on secondary market to compensate for the deferred sale of OGDCL (which explains Dar’s anger against the Qadri/Khan sit-ins); and (v) the following note by IMF that compromises Dar’s claims that he has increased reserves, ie, “adjustments to the end March performance criteria on Net International Reserves (NIR) and NDA were proposed to reflect higher reserves accumulation by SBP”.
The review notes that foreign exchange reserves reached 10.5 billion dollars by end December 2014 – 72 percent of the adequate level – and are expected to exceed 15 billion dollars by end June 2015 supported by an oil price windfall (an external factor), SBP interventions (that are not supported by the IMF given its assessment of an overvalued rupee), multilateral and bilateral disbursements (which have raised the country’s indebtedness though annual interest payments and yet remain understated due to the rupee appreciation) and privatisation proceeds. Privatisation – be it an outright sale of entities or sale of partial shares of an entity – is being opposed by several opposition parties and one wonders if litigation as in the past would derail the process along the line.
The review notes that the rupee is over valued against the dollar (to the tune of 10.6 percent since the onset of the Fund programme less than two years ago) and other currencies and the lack of downward exchange rate flexibility and a high inflation differential relative to trading partners has caused loss of Pakistan’s export competitiveness. However, while exports have declined remittances remain high though there are concerns over the possibility of retaliation by the Saudi Arabia led coalition against the Houthis in Yemen for the Pakistani government’s refusal to put boots on the ground in Yemen.
Tariffs are also widely thought to be an impediment to exports particularly with respect to delays in refunds as well as a complicated tariff structure – a problem that has been evident in this country since decades. The sixth IMF review highlights government agreement to reduce the number of slabs to four (from six in the current year) with all items paying 30 percent to a new maximum of 25 percent. A reduction in tariffs, a standard normal multilateral condition, does fuel imports in developing countries.
The only major macro economic indicator that showed a positive trend was remittance inflows and here too one cannot credit the government policies. In this context, Chaudhry Sarwar, former Punjab Governor, expressed dissatisfaction at the Punjab government’s refusal to take proactive action against the qabza groups that are taking possession of the properties of those who send remittances. To support dual nationals to stand for elections, hold public office as well as be inducted as senior bureaucrats would benefit a very small number of people with political affiliations. That policy too needs a revision. Besides, according to analysts, remittance growth is not attributable to claims by our finance ministers – from Hafeez Sheikh to Dar – that their policies have played a pivotal role but to a natural growth.
What is interesting about the sixth review is the abandonment of some commitments and delays in implementation of others. The abandonment of the focus in the first letter of Intent submitted by the government, a prerequisite for the approval of the EFF, on improved trade relations with India has been abandoned no doubt attributed to Modi’s recalcitrance and there have been visible delays in the privatisation process. Added to this is the National Financial Strategy that would seek to extend credit to the vulnerable (in rural and urban centres) and SBP with the World Bank assistance has been developing this strategy. The NFI Council would launch the NFIS by the end of this month or early next month – a council chaired by Ishaq Dar – which perhaps is Dar’s replacement for the youth loan scheme that was headed by Maryam Nawaz and failed to deliver as the criteria for the loan made it unlikely for the vulnerable to be eligible.
The rest of the Fund’s assessment is alarmingly similar to reviews when Pakistan was on the 2008 Stand-By Arrangement (SBA) with an understandably increasing reliance on prior conditions. Thus the Fund maintains that (i) tax reforms are necessary to not only broaden the tax base and improve tax administration but in the sixth review the Fund required the government to introduce compensatory measures to cover the revenue shortfall; this led to lowering the pass through of the international price of oil as well as imposition of other taxes; (ii) implementing structural reforms in the energy sector and reducing electricity subsidies which implies higher tariffs or else reduce transmission and distribution losses and eliminate circular debt – reforms that this government appears to be incapable of implementing like its predecessor; and almost a corollary in our case saving the windfall from fall in international oil prices to strengthen foreign exchange reserves and safeguard against a higher than budgeted fiscal deficit; (iii) preventing a further loss in export competitiveness or in other words urging the Finance Minister to abandon his policy of keeping the rupee strong through market interventions; (iv) making SBP autonomous in letter and spirit – a policy that Dar opposes privately though one would suspect that he would legislate as required though not implement it in spirit; (vi) anti money laundering act to include tax evaders – a condition that he cannot pass through parliament given not only the extent of tax evasion by our parliamentarians but also a flawed tax structure that provides loopholes to the wealth; (vii) public debt management reforms – again Dar is unlikely to rely on borrowing from SBP as agreed with the Fund but he has relied to the tune of 50 percent on short-term very expensive borrowing from commercial banks raising the domestic debt servicing rate dramatically; (vii) progress on safeguarding financial stability and expanding credit growth; and (viii) improving the business climate to unlock Pakistan’s long-term growth potential – laudable objective but unfortunately it continues to be compromised by Dar’s policy to reduce deficit at the cost of economic growth.
To conclude, Dar has done just about enough to qualify for the release of the next tranche and included in this is the Fund’s increasing reliance on prior conditions – a reflection of the fact that promises/commitments may no longer be enough to ease their concerns. These prior conditions included (i) draft law on SBP in line with IMF suggestions – a law that would not be implemented in spirit as long as Dar is in office, (ii) raise GST on petroleum to 27 percent and include additional measures to include 0.1 percent of GDP reduction in electricity subsidies with total yield of 0.35 percent of GDP to assure compliance with year end fiscal targets, and given that the general public would pay the price and with the decline in the international oil price that mitigated the political fallout of a raise in tariff this has already been implemented; and (iii) tax measures to recover part of Gas Infrastructure Development Cess proceeds focusing on areas where large collecting agents have already collected GIDC in their price with a yield of 0.3 percent of GDP. Given that the Supreme Court has rejected the government’s review petition one may well expect a mini budget prior to the announcement of next year’s budget.
Anjum Ibrahim, "The IMF review: favourable or not!," Business recorder. 2015-04-20.Keywords: Economics , Economic issues , Economic system , Economic policy , Economic planning , Foreign exchange , Foreign policy , Domestic debt , Privatization process , Economic indicators , Economy-Pakistan