The International Monetary Fund's Extended Fund Facility (EFF) programme design for Pakistan (July 2019-September 2022) is uncannily similar to that for Egypt (November 2016-2019 with the last mandatory review held on 24 July 2019) leading critics to maintain that it is simply a copy-paste and fails to take account of differences between the two countries. The question is if this is a fair assessment.
This query is not being raised to silence (or empower) Dr Reza Baqir's critics, the recently appointed State Bank Governor, who was Senior Resident Representative of the IMF in Cairo prior to being given the rare opportunity and honour to become SBP Governor, as he was not the designer of the Egyptian or the Pakistani programme; his role is limited to that of an implementer.
Be that as it may, there are some startling similarities in the performance of key macroeconomic indicators of the two nations before each opted to seek yet another Fund programme (21 for Pakistan and 9 for Egypt) - unsustainable budget deficit (Egypt with over 9 percent in 2016 and Pakistan claiming a deficit of 7.2 percent for last fiscal year with independent economists claiming it is closer to 8.6 percent), high debt to GDP ratio (Egypt registered 92.3 percent in 2016 while in Pakistan it was well over 72 percent last fiscal year), high subsidies indicative of poorly performing utility sectors particularly energy, and dangerously low foreign exchange reserves (not enough to meet the minimum three months of imports required at the start of the Fund programme).
The two major policies that brought about this state of affairs for the two countries were: (i) deliberately keeping the local currency overvalued leading to declining foreign exchange reserves, and (ii) rising expenditure and a grossly inadequate, inefficient and corrupt revenue generating structure.
Amr Adly writing for Bloomberg 30 January 2019 states that the November 2016 EFF for Egypt "committed to the all-too-familiar austerity measures of subsidy cuts and tax hikes, in addition to the flotation of the Egyptian pound, which lost 50 percent of its value overnight..... Given the heavy import-dependency of Egyptian producers, the IMF deal had a negative impact on their sectors in 2016 and 2017. The sharp depreciation of the Egyptian pound meant higher production costs. It also caused inflation which, combined with other austerity measures, compromised the purchasing power of Egyptian consumers. The state's expanding debt and higher interest rates crowded out the private sector."
The all too familiar austerity a la IMF style included the following four major measures implemented by Egypt (and implemented as prior conditions for Pakistan) under the EFF - policies praised by the Fund on its website.
First, Egypt supported a flexible exchange rate subsequent to going on the Fund programme and according to the Central Bank of Egypt, the erosion of the local currency vis a vis the dollar accounts for an increase in debt servicing to 19 per cent (62.1 billion dollars) in 2016/2017 projected to rise to 21.8 per cent by 2020. In 2016 Egypt's external debt was 55 billion dollars and by late 2018 it had risen to 92 billion dollars - a rise of 67.2 percent in just two years during the Fund programme. Adly forecasts that it will not be long before the country's finances are once again in crisis.
Pakistan under the Fund's 'prior' condition began supporting a flexible market determined exchange rate soon after the staff level agreement was reached on 12 May 2018. The Memorandum on Economic and Financial Policies, an attachment to the Letter of Intent signed off by the Advisor to Finance and SBP Governor, a prerequisite for the Fund's Board of Directors approval for the 6 billion dollar EFF, envisages securing 38.6 billion dollars during the 39-month duration of the programme. In the current year, the government claims it has "secured financing commitments from bilateral and multilateral partners as follows: China 6.3 billion dollars, Saudi Arabia 6.2 billion dollars, the UAE one billion dollars (one would be forced to assume that Emirates is not extending the remaining two billion dollar pledged loans to Pakistan), the World Bank 1.3 billion dollars, Asian Development Bank 1.6 billion dollars and the Islamic Development Bank 1.1 billion dollars.....we have also reached agreements with our main bilateral partners to maintain their exposure throughout the programme period and are further working on the modalities to ensure the new financing will be consistent with the programme debt sustainability objectives." Total new loans for the current year alone would be 16.4 billion dollars - 42.4 percent of the total 39-month requirements with external debt projected to rise to 37 percent of GDP by the end of the current year driven by sizeable external borrowing, a large current account deficit and currency depreciation. Pakistan's debt would peak in 2021 and then decline due to narrower current account deficit, non-debt creating capital inflows and recovery in economic growth.
But would this favourable scenario pan out by 2021? Probably not as current account deficit decline in Egypt was driven by the IMF supported flexible exchange rate which initially led to lower imports. Egypt's export base, like Pakistan's, is very narrow, and relies heavily on imports of raw material, intermediate goods and capital goods. Thus as imports declined so did productivity leading to massive layoffs. With the completion of the IMF programme imports are again picking up which implies higher domestic output but also a higher current account deficit. Egyptian exports, as per Adly do not enjoy high elasticity, and have not been able to capitalize fully on the cheaper pound. Egypt relies on tourism as a major source of foreign exchange earnings (around 12 billion dollars per annum) though security concerns are impacting negatively on tourist inflows and remittances is another source of foreign exchange inflows.
The damage done to the economy in general and exports in particular courtesy Dar's flawed policies, keeping the rupee overvalued as well as borrowing heavily from abroad to prop up the reserves, has yet to be reversed. The PML-N administration announced a 180 billion rupee export package, only partially implemented by Ishaq Dar, which was then enhanced once he slunk out of the country, but without any appreciable success. The IMF package envisages market based foreign exchange rate to be the prime determinant of a rise in exports. This is unlikely given that our exports do not enjoy high elasticity, like Egyptian exports. Besides in today's highly competitive international market once exporters lose clients getting them back is not an easy task. Additionally, the Fund programme supports ending subsidies/special treatment to all sectors (other than the poor and vulnerable) however the government has continued to provide electricity subsidy and fiscal incentives to the productive/industrial sectors. Whether it would be able to continue would depend on the success of the revenue measures.
Second, while the Fund supported reducing the budget deficit in Egypt in Pakistan the deficit is projected to decline by a very small margin - from 7.2 percent of GDP last year (though the jury is out as to whether this is a realistic estimate) to 7.1 percent this year. And while expenditure has not been budgeted to decline under current or development expenditure or in terms of lower total subsidies the governments of both Egypt and Pakistan agreed to raise taxes. Raising income tax on existing taxpayers and the continuation of withholding taxes in the sales tax mode (a component of direct tax collections) is hurting the middle and lower income salaried people. The government is engaged in bringing more people into the tax net however it is unclear whether the increase in the number of filers would lead to higher tax revenue.
And finally, the IMF's claim that the programme is designed to insulate the poor from the effects of the reform package. The staff report on Egypt states that about 1 per cent of GDP in fiscal savings will be directed to additional food subsidies, cash transfers to the elderly and poor families, and other targeted social programmes which would use a "proxy means test" to identify eligible households within selected districts. But weak governance leaves these programmes vulnerable to abuse and manipulation and as per Adly "most fundamentally, the scale of the programmes is too limited; they aim to cover about 1.5 million households by 2019; this represents about 40 per cent of the poor, meaning the remaining 60 per cent will be left to face the impact of rising living costs without support." Adly further argues that "the Fund's apparent lack of attention to sequencing reform measures is leading to adverse effects on the overall performance of the economy, as well as the status of economic and social rights. For example, subsidy removals have been expedited before the Egyptian government has built up the technical capacity to properly implement social protection programmes that target the poor."
Ehsaas programme of 200 billion rupees, with the Benazir Income Support programme subsumed in it (which was allocated 118 billion rupees last year) is grossly inadequate to meet the needs of the existing vulnerable leave alone the hundreds of thousands likely to lose their jobs as growth is projected to decline to 2.4 percent in the current year. The Prime Minister's directive to divert the money generated from making the corrupt return the money they stole to social sector programmes is unlikely to bear fruit in the short term.
Today at the end of the programme Egypt has become highly indebted with a high rate of inflation - factors that would plague the majority of the people of Pakistan within the next two to three years.
Time and again the Fund has displayed lack of capacity in ascertaining the impact of its programmes on the people of a country and to evaluate the debtor government's capacity to withstand public dissent. In this context it is relevant to note that Egypt is under military rule where dissent or criticism is not necessarily tolerated or encouraged; however, Pakistan is a democratic country with a democratically elected government. And as the value of each rupee earned continues to erode (with pays largely static in the private sector to last year's levels) and as unemployment rises the resulting socio-economic impact may make it extremely challenging to sustain any government however popular.
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