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EDITORIAL: There are three important declarations contained in documents on the first review of the Stand-By Arrangement uploaded by the International Monetary Fund (IMF) website on 21 January 2024, which were not highlighted either in the press release issued after the staff-level agreement (SLA) was reached on 15 November 2023, or the subsequent approval of the 700 million dollar tranche released by the Board of Directors dated 11 January 2024.

Although, the IMF is neither qualified nor empowered to assess politics of a member country, we would assume that given the scheduled general elections on 8 February, Fund staff felt it appropriate to note risks to implementation of policy reforms agreed under the SBA.

Be that as it may, there is no doubt that referring to IMF staff meeting with the leadership of all three major national political parties back in July 2023 with the objective of seeking their support for the SBA approval conditions may no longer reflect the current political compulsions of all three major parties.

This includes Pakistan Muslim League-Nawaz (PML-N), which had negotiated the SBA in June last year as the then Prime Minister Shehbaz Sharif had been forced to bypass the then finance minister Ishaq Dar who was being held responsible for derailing the ninth review of the then ongoing Extended Fund Facility (EFF) programme by violating critical agreed conditions.

Pakistan People’s Party (PPP), a member of the then coalition government had left finance decisions to the PML-N and when questioned maintained that as a coalition partner the party supported all measures by the Finance Minister; however, last week Chairman Bilawal Bhutto-Zardari explicitly stated on television that Ishaq Dar’s flawed policies were responsible for the current deep economic impasse. The leadership of the Pakistan Tehreek-e-Insaf (PTI) is however no longer a major player in politics in the foreseeable future – be it in terms of leading the house or leading the opposition in parliament.

Be that as it may, the caretaker government’s request to defer the second review by 15 days - from 1 to 15 March - to implement the first review conditions may well be to ensure that a new elected government would be in place by that time, which can then reconfirm the first review conditions and set the stage for securing another longer term loan necessary to meet next year’s debt servicing payments and repayment of principal as and when due.

The newly created Special Investment Facilitation Council (SIFC), represented by senior military and executive/bureaucratic personnel, empowered to take key decisions may well mitigate the risk associated with the elections and its aftermath; however, the Fund staff has reiterated its concern that care must be taken to ensure that SIFC does “not create an uneven playing field, promise incentives of any sort or guaranteed returns, distort the investment landscape, or increase the role of the state, which could disincentivise high-quality, long term investments.”

Second, it is rather disturbingly noted in a footnote rather than in the body of the main text (though it was noted in the Technical Memorandum of Understanding (TMU) attached to the SBA request on 30 June 2023) that conversion of external financing flows should be at actual average quarterly exchange rates.

The rationale provided was that “a large bilateral disbursement occurred in mid-July following a period of rupee appreciation; the actual average quarterly exchange rate overstated the financing generated in domestic currency terms, leading the Quantitative Performance Criteria on the general government primary budget balance to be missed”.

The Fund report notes that going forward “the TMU has been amended to evaluate external financing flows at actual exchange rates while the authorities commit to reporting external financing flows and applicable exchange rates at a more granular level”.

This approach, much in use by Ishaq Dar, to show a deficit lower than was in fact the case will no longer be an option in the foreseeable future, given the high level of external financing required for the next few years.

As repeatedly highlighted by Business Recorder during the past six months, the first review documents note “exceptionally high financing risks” arising from large public sector rollover needs from Saudi Arabia, the United Arab Emirates and China, “a persistent current account deficit” (with the government focused on contracting trade deficit achieved through import controls which are impacting negatively on productivity while the financial account component of the current account has been deteriorating), “due to a difficult external environment for Eurobond and Sukuk issuance” (attributed to Pakistan’s rating being static in spite of the November SLA, and “limited reserve buffers in case of delays in anticipated inflows,” reserves that are propped up by borrowing with associated costs.

The economic team leaders – caretaker finance minister and Governor State Bank of Pakistan – pledged to continue “advancing gradual fiscal consolidation – underpinned by continued spending restraint, effective execution of revenue measures and, if necessary, contingent measures to help lock in a solid primary surplus.”

Given the 215 percent rise in borrowing from commercial banks - 3.214 trillion rupees during the first six months of the current year against 1.019 trillion rupees in the comparable period of the year before - it would have been appropriate for the economic team leaders to reveal which items other than development spending (reduced for the first six months by no more than 300 billion rupees) had been curtailed.

The government noted the 115 billion rupees overspent by the Punjab Government for commodity operations, an expense that a caretaker government should not have been empowered to undertake, and added that the provincial government has pledged in a memorandum of understanding to reduce its overall expenditure by that amount till the end of the fiscal year – a pledge that would have to be met by the next elected government in Punjab.

In addition, the contingent revenue plan will also have to be approved by the elected government and that may be a challenge as the sensitive price index was 44.64 percent for the week ending 14 January - unbearable for even middle income earners.

And finally, it is unclear whether the Fund’s insistence on adhering to the revised 2023-24 budget (revised as per prior conditions of the SBA), approved by parliament is indeed a step in the right direction for three reasons: (i) indirect taxes form around 80 percent of all tax collections in the current year whose incidence on the poor is greater than on the rich and this does not include petroleum levy, another indirect tax, itemised under other taxes.

Claims that efforts are under way to widen the tax net must be seen in the context of past such efforts, which did not lead to higher collections even though the number of filers rose dramatically but of those who were not liable to file returns like widows, students and the retired, as they wanted to take advantage of lower withholding taxes imposed in the sales tax mode on filers as opposed to non-filers; (ii) current expenditure, budgeted at 92 percent of total budgeted outlay, continues to rise not backed by development expenditure leading to higher borrowing by the government that is crowding out private sector borrowing with a negative impact on national output; and (iii) reliance on higher crop output in the aftermath of the floods last year to raise output projections to 2 percent in the current year maybe an overambitious target, even though the base is at a low of negative 0.2 percent, given that the government is slashing development outlay while the industrial sector’s input cost, in terms of borrowing and utility rates, is prohibitively high.

To date, it is noteworthy that structural reforms have not yet begun to be implemented though plans are being drafted, plans which could be redrafted by the next government. It is only the quantitative targets specifically with reference to administrative measures requiring electricity and gas tariff upgrades (inclusive of taxes imposed on utilities) to meet the objective of full cost recovery, high discount rate to ensure a positive rate of return that are being implemented – a practice of passing on the buck to the hapless consumers that has been in evidence since long.

The Benazir Income Support Programme (BISP), for which 471 billion rupees budgeted this year, envisages 3,000 rupee every three months to the beneficiary with a family of 5, money that is insufficient for a country with a Sensitive Price Index of 44.6 percent and where poverty is said to have reached 40 percent.

Copyright Business Recorder, 2024

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