The IMF team in Pakistan will continue the talks on the pending review. However, there is no surety that the talks will end at a staff-level agreement (SLA). The fiscal gaps are higher than what the government is showing. And the taxation measures the government is offering have quality issues. Unleashing the currency peg was a necessary but not sufficient condition for the IMF to come back.
There are two problems. One is the willingness of the government (due to political considerations) to take all the required steps. And the other is the capacity of the Ministry of Finance and the State Bank of Pakistan to negotiate and implement the steps in the right manner and fashion.
The political uncertainty does not help. Although IMF doesn’t talk about it explicitly, boiling political temperature creates doubts in the mission’s mind about the ability and commitment of authorities to take the right steps. For example, the statement of the Minister of Power about not increasing the tariff hike doesn’t bode well. Political capital (or lack of it) has an impact on negotiations. There have been bitter experiences in this program in the last eighteen months. That has a toll.
On the fiscal side, the bigger issue is the quality of taxes. IMF may not be happy with one-offs – such as windfall taxes on banking income. There must be a limit to squeeze any one sector. IMF is likely to be not happy with the proposition of withholding taxes on banking transactions. Then, enhancing import duties may not be well received by the IMF. The government needs to think about more sustainable taxation measures and work on broadening the base.
In the past (during 2019-2021), the slackness of Q-block due to political considerations and due to the lack of capacity, was well-filled by the then leadership of SBP. That connection is dearly missing today. Unfortunately, none of the three – the SBP Governor and two Deputy Governors—is a monetary economist. They have either banking or banking supervision experience. However, the capacity to deal with the current exchange rate crisis is absent.
The communication of SBP is becoming weaker. In many instances, the institution likes to remain silent. And at times, communication does more damage. The signaling is weak in the markets. For example, a recent statement rebutted media claims of losing $3 billion in remittances and exports due to currency capping lacking substance. If the global slowdown and high inflation are reasons for the decline of Pakistani exports and remittances, why are these areas improving in other competitive countries? SBP cannot be exonerated from its policy of capital controls and currency peg. SBP cannot be exonerated by not taking its true independent position on paper.
These are the ground realities. The question is what would happen if there was no SLA? Will it result in clubbing of the 9th and 10th reviews? How will the reserves positions be managed if the IMF review is delayed? Honestly, there are no clear answers, only suppositions. One can find short-lived relief in knowing that it isn’t over till the fat lady sings.
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