EDITORIAL: The International Monetary Fund team (IMF) is currently in Pakistan for the first scheduled Stand-By Arrangement (SBA) staff review and, subsequent to data sharing, discussions on the implementation status of time-bound conditions and structural adjustments are ongoing which were agreed by the eleven-party coalition government led by Shehbaz Sharif in June this year.
The administrative decisions are being implemented, specifically with respect to electricity tariffs reflecting full cost recovery (including absorbing the sustained poor performance of sector players ranging from generation to distribution companies which account for the 2.6 trillion rupee circular debt today), as well as generating the budgeted 869 billion rupees from petroleum levy.
This is in spite of the fact that these are hugely politically unpopular decisions that contribute to a consumer price index of 26.9 percent for October and a combined sensitive price index for all income quintiles for the week ending 2 November 2023 of 29.88 percent.
One way out of the circular debt conundrum, as envisaged by the previous three elected governments represented by all the political players today, was to allow provinces to run distribution companies – a stance that presupposes that the closer the management of any entity is to the end consumers the better would be its ability to gauge and resolve the lacunas in the system.
Be that as it may, the crackdown on the exchange companies that began on 7 September and led to a consistent appreciation of the rupee has witnessed a reversal of fortune since a week ago prompting some economists to argue that this may be due to the Fund team’s assessment that the market-based exchange rate policy agreed under the SBA may have been abandoned in favour of reducing the impact of imported inflation in the country.
While the CPI has declined from 31.4 percent in September to 26.9 percent in October – a decline of 4.1 percentage points, yet there is some evidence that this is attributable to a decline in the international prices of fuel, which may not be sustained as the Middle East crisis shows little or no sign of abating. However, as technical negotiations on the first review have not yet been completed, and which will be followed by policy negotiations on the last two to three days of the mission, it is unclear whether the matter of the rupee-dollar parity has come under discussion yet.
Reports indicate that the Fund team has queried the Federal Board of Revenue (FBR) on the implementation status of reforms that were agreed with widening of the tax net to include those currently out of the net (real estate players, builders, wholesalers and retailers, and rich farmers) and the continued inordinately heavy reliance on indirect taxes whose incidence on the poor is greater than on the rich.
In other words, the realisation of the 9.4 trillion rupee target agreed with the Fund in June under the SBA, the focus of the government, is not the focus of the Fund – a Fund stance that the public would wholeheartedly support.
And finally, there is some ambiguity as to whether the shortfall in external resource mobilisation is a precondition for the next tranche release or whether the Fund would apply an adjustor that would enable the implementation deferment of this condition.
One observation may be relevant. First, as the SBA’s scheduled end is 12 April 2024 therefore with two and a half months remaining till the end of the fiscal year on 30 June, no specific precondition was noted in the SBA documents with respect to budgeted procurement of the external funds pledged by friendly countries and/or through incurring debt equity and borrowing from the commercial banking sector abroad.
In the event that the shortfall persists, due mainly to the high cost of equity and commercial borrowing as Pakistan’s rating has not improved since the SBA was approved as expected, therefore there is a serious concern that in the event the first review staff-level agreement is reached on the pledge of all prior conditions being met by the second review yet if the shortfall persists two to three months down the line it may pose a challenge to the second and final SBA staff-level agreement.
Copyright Business Recorder, 2023
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