Mid year review of economic situation

The Economic Advisors Wing released a mid year review of the countrys economic situation (July-December 2008) that reveals that the economic stabilisation programme is on track. The review notes that signs of early recovery are becoming visible while fiscal and current account deficits have depicted improvement, exchange after depreciating in the period July-November 2008 has remained stable since inflation has started responding to the demand management, and foreign exchange reserves are starting building up.
Many maybe tempted to argue that the stabilisation programme is entirely the outcome of negotiations between the International Monetary Fund (IMF) staff and the government of Pakistan that culminated in the approval of the 7.6 billion dollar stand-by arrangement in November 2008.
There is obviously some truth to these assertions as negotiation between the IMF and the government was an ongoing process and did constitute a number of measures that were taken by the government as pre-loan conditions indicated in the Letter of Intent (LoI).
These included (i) the objective of increasing tax revenue to reach the target of 0.6 percent points of GDP by the end of the current fiscal year, (ii) reduction in non-interest current expenditure by 1.5 percent of GDP through elimination of oil subsidies by December 2008 (adjusted three times since June 2008) and electricity subsidies by June 2009 (adjusted by an average of 18 percent till September 20 2008), (iii) domestically financed development expenditure began to be reduced last year to reach an overall target of 1 percent of GDP by end of the current fiscal year, (iv) government committed to end SBP borrowing on a cumulative basis starting October 1, 2008 till June 30, 2009, (v) tax audits reintroduced as part of risk based audit strategy in December 2008, and (vi) SBP began its monetary tightening policy and increased discount rate by 200 basis points to 15 percent in October/November of last year.
These politically extremely unpopular measures have led to an improvement in key macroeconomic indicators, as noted in the mid year review, which are mainly responsible for the decision of the IMF to release the second tranche of the stand-by arrangement end-March 2009. However as is clearly evident from recent statements by senior officials dealing with finance as well as the major thrust of ministers and advisors media talks there is a need for the government to generate further resources from external sources.
It is in this context that the Friends of Democratic Pakistan (FODP) forum will meet in Tokyo on 17 April that would identify projects critical to strengthening the deficient infrastructure and social sectors in Pakistan. The FODP would be followed by the donors meeting where pledges are expected. The extent of the pledges required vary from 5 to 10 billion dollars and point to the need for generating further resources to meet the fiscal year end macroeconomic targets as identified in the LoI.
The IMF had noted post approval of the stand-by arrangement that the government expected to generate around 13 billion dollars from external resources, money that was already committed according to the Fund. Data reveals that to date the government has been able to attract only 5.66 billion dollars out of which 3.9 billion is the cumulative proceed from the IMF first and second tranches. Thus the urgency to generate more external resources before fiscal year end.
Analysts do not hold much hope for an injection of 10 billion dollars given the continuing global financial crisis as well as recession. However they are hopeful that a least three to four billion dollars may be forthcoming. Without this money the government will be unable to meet its other expenditures including defence that would make many Western capitals nervous.
That remains our trump card unfortunately in the short term. In the medium to long term it is hoped that the government formulates a home-grown reform agenda that relies on domestic as opposed to external sources to provide stability to our macroeconomic indicators.