The IMF programme interregnum

Completion of the fourth quarterly review by the IMF has been delayed now for more than a month. What are the reasons for the delay? Is it due to the inability to meet the performance criteria and structural benchmarks for the last quarter of 2013-14? Alternatively, does it reflect IMF's concern about the adequacy of measures proposed to meet the targets in the Budget for 2014-15 and other macroeconomic targets?
The media has reported that the delay is due to the lack of increase in power tariffs as agreed by the 1st of July 2014. Also, the IMF apparently wants strengthening of the autonomy of the SBP by legal and other provisions.
Clearly, the IMF ought to understand that power tariffs cannot be raised at this time given the current political situation, the high levels of power loadshedding and vociferous complaints about over billing. In these circumstances it will not be possible to bring down the tariff differential subsidy substantially by Rs 124 billion, as proposed in the Budget of 2014-15.
The added problem is that the Supreme Court has endorsed the judgement of the Islamabad High Court and declared the imposition of the Gas Infrastructure Development Cess (GIDC) as invalid. This creates a big hole of Rs 145 billion in the Budget for 2014-15. Apparently, the Government is trying to bring back the GIDC through an ordinance. However, since this is an earmarked source, the revenue from it will need to be kept outside the Federal Consolidated Fund and annual reports of utilisation presented to the National Assembly. Further, the provincial Governments may insist on a share from the proceeds.
The costs of relief, rehabilitation and reconstruction after the floods will also raise expenditure .The 50:50 sharing by the federal and the provincial Governments is a good decision. Initially, an ad hoc relief of Rs 25000 will be provided to each affected family. This will cost Rs 15 billion. Thereafter, a proper compensation package will be implemented. It is likely that funds will be diverted from the PSDP to finance these costs, which could eventually aggregate to almost Rs 100 billion.
The Fund needs to realise that all macroeconomic targets have become unattainable after the floods. The GDP growth rate is likely to fall to about 2.5 percent, the current account deficit could approach 3 percent of the GDP and inflation could jump to a double-digit rate. If retirement of circular debt of the power sector of over Rs 250 billion takes place and tax revenues do not grow as fast as targeted, then the fiscal deficit in 2014-15 could approach 6.5 percent of the GDP, as compared to the target of 4.9 percent. The fifth and subsequent reviews could prove to be even more difficult as the macroeconomic targets become more elusive and more reforms and policy actions are required.
The increasing vulnerability of the economy is demonstrated by the fact that after a continuous increase from March 2014 onwards, foreign exchange reserves have started falling once again. The decline in July and August 2014 would have been larger but for the release of a quarterly instalment by the IMF, a CSF tranche and some privatisation receipts.
The last big floods were in 2010-11, when the IMF Standby Facility was in operation. Thanks are due to the understanding shown by the Fund at the time. The targets were relaxed and the year ended with a fiscal deficit of 6.6 percent of the GDP as opposed to the target of 4 per cent of the GDP. Also, for the first time the IMF added an emergency fiscal injection, as opposed to balance of payments support, of $450 million on 2nd of September 2010 to help the government defray the costs of relief, rehabilitation and subsequent reconstruction after the floods. Indeed, the Fund showed that it had a 'human face'. Conditions are similar now, but with the added complication that there is a beleaguered government, which could take some time to get back on its feet and start once again the task of actively managing the economy. Therefore, is it unreasonable to expect the Fund to show a human face once again?
A delay in the process of release of the further instalments may have a devastating effect on market confidence, which is already low. It will severely damage the prospects of access of Pakistan to the International capital market, diminish the interest of foreign investors in the privatisation process and lead to the deferment of program assistance by international agencies. This could reduce external capital inflows by over $2 billion in 2014-15. Along with a larger current account deficit the foreign exchange reserves of the country could fall sharply.
A de facto suspension of the Fund Program could send both the stock and foreign exchange markets into a tail spin. This will lead to an exponential increase in the price level in combination with the supply shock due to the floods. Therefore, it is imperative that the Fourth Review be finalised soon and implementation of structural reforms deferred somewhat for more normal times.
(The writer is the managing Director of the Institute of Policy Reform and former Finance Minister)