ARTICLE: Questions are being raised as to when the 6 billion dollar International Monetary Fund's (IMF) Extended Fund Facility programme will resume, suspended post-March 2020 to enable the administration to deal with the onslaught of Covid-19; and whether it would entail fresh negotiations or the same staff level agreement on the second review would be valid with reportedly 'prior' conditions that was reached on 27 February 2020.
The February staff level agreement has not yet been uploaded on the IMF website, pending as is usual its Board approval, and with the Ministry of Finance extremely reticent about sharing details with the general public, the contents of the second staff level agreement are, at best, speculative. Be that as it may, the Fund has been extremely upfront in documents relating to Pakistan's request for Rapid Financing Instrument (RFI) dated April 2020 with respect to: (i) the country facing an unprecedented health and economic shock, creating an urgent balance of payments need estimated at 2 billion US dollars (0.8 percent of GDP) in the final quarter of 2019-20 which, incidentally, has already been approved and disbursed by multilaterals (with the Fund approving 1.4 billion dollars), and a potential financing gap of 1.6 billion dollars that could emerge in the current year, which one may assume will be relatively easily procured from either friendly countries and/or foreign commercial banks; and (ii) given Pakistan's limited fiscal space and remaining vulnerabilities enacted support measures must be targeted and temporary, focusing on the immediate health spending needs and protection of the most vulnerable while preserving long term sustainability. In this context the authorities must decisively press ahead with reforms included in the EFF as soon as the immediate crisis pressures subside, the Fund urged.
These two elements together indicate that the authorities leverage to convince the Fund to ease/phase out the conditions agreed on 27 February is severely limited. And constant claims by the Prime Minister and head of NCOC Asad Umer that Covid19's attack on this country have not followed the same devastating trend as in other countries is hardly likely to strengthen the hands of the Ministry of Finance in its talks with the Fund to phase out the conditions agreed on 27 February.
Be that as it may, it is significant that Prime Minister Imran Khan while chairing a Dr Hafeez Sheikh-led think tank meeting on 20 July 2020 directed the establishment of a cell to review the entire subsidy system with the objective of targeting the poor and the vulnerable, while also taking account of benefits from Ehsaas programme, subsidized tariffs on gas and electricity and special rates of specific essential items available in Utility Stores Corporation.
This meeting was held a mere three days after the decision makers in the Ministry of Finance, who inexplicably did not wish to be named, met with a select few beat reporters and claimed that they were focused on the budget and Covid-19 while the IMF had linked resumption of EFF to a "clear plan" - the clarity assumed to be a reference to implementing time bound structural benchmarks and quantitative targets that Dr Sheikh together with Dr Reza Baqir, Governor State Bank of Pakistan, signed off-on on behalf of the Khan administration and the people of Pakistan on the EFF dated July 2019, the first review report dated December 2019 and the staff level agreement reached on 27 February 2020.
The senior Ministry officials itemized a few 'irritants' in the resumption of the IMF programme including power tariff adjustments, amendments in the National Electric Power Regulatory Authority (Nepra) Act for quarterly adjustments and changes in the SBP law but tellingly remained more focused on reducing budgeted outlay on pensions (civilian and military) which for the current year are budgeted at 470 billion rupees - a mere 5.738 billion rupees less than the running of the civilian government - and streamlining and targeting subsidies. This was followed by the claim that budgeted pension outlay would decline as a consequence of computerization by both the civilian and military authorities, implying thereby the existence of massive irregularities including the prevalence of ghost pensioners.
The total budgeted expenditure envisaged for the current year includes 6344.6 billion rupees current expenditure, 650 billion rupees federal Public Sector Development Programme and 70 billion rupees development expenditure outside PSDP giving a total of 7064 billion rupees. The total allocated for pensions and subsidies in the budget for 2020-21 was 470 billion rupees (military pensions 369 billion rupees and civilian pensions 111 billion rupees) while subsidies were allocated 209 billion rupees or a total of 679 billion rupees. Thus these two items account for no more than 6.65 percent of total outlay. And interestingly these two items have been allocated much less than the big guzzlers in the budget for the current year compared to the revised estimates of 2019-20: (i) subsides were budgeted 271.5 billion rupees last year with the revised estimates of 349.5 billion rupees or budget allocation in the current year has declined by 23 percent compared to the budget for 2018-19 and by 40 percent compared to the revised estimates; and (ii) pensions have risen in the current year by 11.6 percent compared to the budget for 2018-19 and by only 1.4 percent compared to the revised estimates.
The big expenditure guzzlers are as follows: (i) markup/interest 41 percent of total expenditure (with mark up on domestic debt accounting for 37 percent of total expenditure), with zero foreign loan repayment in the current year, (ii) defense and services 18 percent of total expenditure, (iii) grants and transfers 12 percent of total expenditure with Benazir Income Support Programme/Ehsaas only 2.8 percent of the total expenditure; and running of civilian government 6.7 percent while pensions accounted for 6.65 percent; and (iv) deal with losses of state-owned entities that have risen to over 4 percent of GDP.
The question is whether the focus on pensions and subsidies was to divert attention away from the delay in the resumption of the IMF programme with talks clearly stalled; or to divert attention from the main expenditure guzzlers; or to flawed policies of the government many of which were premised on the two economic team leaders either being unaware of on-the-ground situation in the country (a likely scenario as Dr Hafeez Sheikh signed on the agreement with the Fund on 12 May 2019 - only 23 days after his appointment and Dr Reza Baqir after only six days) or having the overarching objective of getting on the Fund programme and hoping to readjust/renegotiate later, an option that is now being denied by the IMF, as the Finance Ministry decision makers clearly indicated to the beat reporters.
The capacity of the public to withstand the upfront extremely harsh EFF conditions was severely tested pre-Covid19 as GDP growth began to shrivel due to contractionary fiscal and monetary policies with rising unemployment levels and inflationary pressures; however post-Covid19 there is simply no capacity and ehsaas programme, however well administered it maybe, is grossly inadequate to deal with the growing ranks of those being pushed under the poverty level due to contractionary policies pre-Covid19, simply exacerbated post-Covid-19. In other words, decisions to implement the agreed IMF conditions are increasingly assuming grave political implications for the incumbent government.
A breakdown of sorts is clearly ongoing between the authorities and the IMF and also reportedly between the Prime Minister and his economic team leaders with Prime Minister Khan contending that the public cannot bear the burden of EFF conditions at present, while his team leaders are insisting that without the IMF programme multilateral and bilateral programme assistance would not be forthcoming and the current account deficit gains made at considerable cost to the quality of life of the people would evaporate in no time.
Pakistan is again between a rock and a hard place however the way forward is to improve governance particularly in the tax sector (under the administrative control of Dr Hafeez Sheikh) and the power sector (Umer Ayub and Nadeem Babar) which in spite of pledges in the EFF have shown no visible improvement; and demand greater sacrifice from the big guzzlers and for the Sheikh-led Finance Ministry to contain its penchant for domestic and foreign borrowing.
Copyright Business Recorder, 2020
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