IMF press release

The International Monetary Fund's (IMF's) press release on the completion of the second review under the 6 billion dollar 39-month Extended Fund Facility programme mission has generated some confusion by providing ample fodder for the government in its own defence as well as its detractors. Thus, while the government would focus on the statement that "all end-December performance criteria were met, and structural benchmarks have been completed" yet detractors would point to the next sentence that states that "steadfast progress on programme implementation will pave the way for the IMF Executive Board's consideration of the review" - a comment that underscores the need for progress to meet the targets that would enable the mission to recommend to its Board to approve the release of the third tranche and represents a change from the norm adopted in previous IMF programmes with this country when even waivers were granted for unmet targets. The reference to continued progress is perhaps with regard to prior conditions for the next disbursement that the government may have assured the Fund mission would be met soon. This view is strengthened by the fact that the mission leader is quoted as having stated that "in the coming days progress will continue to pave the way for the IMF Executive Board's consideration of the review," though he, unlike official statement, did not restate that "all end-December performance criteria were met and structural benchmarks have been completed."

During the first review, it was noted that the release of budgeted allocations for social sector development were less than one percent during the first quarter of the year and less than 9 percent for Public Sector Development Programme; prompting the Fund to state that "the authorities remain committed to expanding social safety nets, reducing poverty and narrowing the gender gap." Benazir Income Support Programme, renamed Ehsaas Kafaalat Programme, received much less than budgeted allocations till end-December 2019 because a fresh survey was undertaken to secure due rights of the deserving by making the process apolitical. If the government does release the entire 190 billion rupees budgeted for social sector development as well as the remaining amount budgeted for PSDP the primary surplus of 0.7 percent, as indicated in the IMF press release may well go into the negative. The mission leader's statement notes that development and social spending have been accelerated though exactly by how much as the first review disbursements were paltry has not been mentioned.

The mission leader also noted that "the current account deficit has declined" and there is no doubt that it has declined and what is generally acknowledged is that it needed to decline on an emergent basis; but he added that this decline was "helped by the real exchange rate that is now broadly in line with fundamentals," - a statement that extends limited support to the State Bank of Pakistan's (SBP's) clarification to Business Recorder that the exchange rate is in line with fundamentals but falls short of actually stating that the REER calculated and uploaded on its website by the SBP has no policy relevance as it is merely an indicative target. The mission leader's quote also notes that "international reserves continue to build at a pace considerably faster than anticipated," brought about by the discount rate, at 13.25 percent, that has lured 3 billion dollars in carry trades into short-term government securities.

The mission leader further noted that 'inflation should start to see a declining trend as the pass-through of exchange rate appreciation has been absorbed and supply side constraints appear to be temporary.' The operative word is "appear" and in this context, the Sensitive Price Index figures released by the Pakistan Bureau of Statistics (PBS) on Friday reveal that there has been a rise in inflation to 16.38 percent year-on-year; however, week-on-week it has declined - a figure that can be challenged on the basis of patently evident discrepancies, for example, wheat flour price quoted by the PBS is at 45.44 rupees per kg which is questionable as wheat is actually 54 rupees per kg on the market.

The Fund's insistence on full cost recovery, a sound economic policy, is unfortunately also fuelling inflation through the failure of the government to improve governance in the power and gas sectors and instead relying almost exclusively on raising rates, passed on to the consumers, to meet this objective. In recent weeks, the Prime Minister appears to have withdrawn his unconditional support for this strategy adopted in the name of improved governance in the power sector no doubt due to ever raising rates.

The mission leader also acknowledged that "fiscal performance in the first half of the year remained strong," though the budgeted tax revenue target remains unmet with a widening shortfall with each passing month. Insiders claim that the government has pledged to raise taxes by 200 billion rupees in the current year while others suggest that the government has convinced the Fund team that it will raise non-tax revenue by a whopping 1,500 billion rupees, a claim that was also made during finance advisor's maiden speech to parliament last week, and that more taxes with the commitment to widen the net will be part of budget 2020-21. There will, however, be greater clarity once the actual second review report is prepared, put up for consideration of the IMF board and the third tranche released, with the report then uploaded on its website.