With the floods and its aftermath making headlines across the globe, the pre-planned visit by the Finance Ministry and State Bank officials to Washington this week, for the scheduled economic review with the IMF has taken a back seat. Nonetheless, the importance of negotiations with the IMF cannot be undermined.
In the aftermath of the floods, the economic team is going to take the fund officials, as well as the other international community into confidence over the fiscal, development and monetary challenges posed by events that are beyond the realm of normal expectations or the unexpected events of large magnitude and consequences.
The art to convince the IMF to release a lump sum payment of the remaining $3.3 billion, of the $11.3 billion Standby arrangement, is a challenge to the economic managers heading Washington. Mr Sheikh and his team are most likely to put a case of further waivers on certain performance indicators to combat the devastating floods across the country.
But under the clouds of the flood, it will be an art to get away with the slippages that have nothing to do with the floods - like over a percent of GDP deviation from revised target in the fiscal deficit for the FY10 and more time for the implementation of the VAT or reformed GST.
Apart from that, the target of the fiscal deficit for FY11 is going to be revised by at least a percentage point of the GDP to deal with the natural calamity. The new estimates for output growth and inflation, while considering the impact of damage caused by the floods, are going to be presented to the IMF.
SBP sources stated last week that the initial impression of loss in the GDP growth is around 1.5 to 2 percent, while officials from the ministry of finance are saying that the impact on growth would be nothing less than 2.5 percent of the GDP.
Although the precise impact cannot be assessed unless the water recedes, the economic team must be running all these simulations and going to put a strong case of more aid from the international community on the basis of social and economic losses to the country.
The permutations and computations which are going to be presented to the IMF may also include some one-time tax measures to partially finance the rehabilitation efforts, the diversion of budgeted development expenditure allocations to the reconstruction of the flood damaged infrastructure and some cut in other expenses.
In a rare appearance last week, the media shy Finance Minister commented to an international media agency that floods could be an opportunity to take tough decisions like higher sales tax, a flood surcharge on well-to-do people and get some leeway from the IMF and support from the international community.
On the higher sales tax, this column had written that after the budget it might not be easy to revert to a lower rate once you locked into a higher sales tax (17%) for the interim period. And VAT might also be introduced at this rate.
While on a one-time levy on the well-to-do people is likely to hit the salaried class, whose tax incidence is already very high. On the other hand, agri-income and tax evaders will be again left untouched by the tough measures.
The options of leeway from the IMF are already mentioned above. The bone of contention is how the economic team will deal with an issue of political rift between the federation and federating units on the implementation of the reformed GST on services.
Can the natural calamity of immense proportions push the provinces and the centre to resolve key macroeconomic issues, is going to be clarified in Washington's meetings.
It is worth mentioning that had the required dams and reservoirs been built in the past thirty years, the impact of floods would have been much lower. And we all know it is the political mistrust that denied it all.
MONEY AGGREGATES:
The currency-in-circulation took a U-turn after a decline for two consecutive weeks as it increased by a massive Rs37 billion for the week ending August 6, tThus taking the year-to-date toll of increase to Rs58 billion.
The increase in CIC is virtually mirrored by the change in the demand and time liabilities, which were slashed by Rs39 billion. In a nutshell the monetary aggregates almost remained at previous week's level for the week ending August 6.
Net foreign assets fell for yet another week. With a Rs12 billion decline last week, the year to date net outflow stood at Rs49 billion.
On the domestic front government heftily borrowed from the central bank to probably finance the rescue efforts for the flood affected. Nonetheless, out of then Rs103 billion, which the government raised from the SBP, almost half is used to retire credit from scheduled banks. With no significant change on quasi-fiscal operations, net government borrowing stood at Rs56 billion for the week ending August 6.
While the private sector kept on its slow southward journey, as with the Rs9 billion fall in credit last week, the year to date decline reached Rs51 billion.
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KEY MONETARY AGGREGATES AS ON AUG 06
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Rs (mn)
6-Aug 30-Jul Change
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Currency in Circulation 58,490 21,160 37,330
Total Demand & Time Deposits (179,430) (139,972) (39,458)
Broad Money (M2) (120,905) (118,778) (2,127)
NFA (48,511) (36,992) (11,519)
NDA (72,393) (81,787) 9,394
Net Government Borrowing 84,505 28,905 55,600
Borrowing for budgetary support 83,846 31,231 52,615
from SBP 105,251 2,293 102,958
from scheduled banks (21,405) 28,938 (50,343)
Commodity operation (8) (2,936) 2,928
Credit to non-govt sector (54,326) (45,026) (9,300)
to private sector (50,721) (41,519) (9,202)
to PSEs (3,666) (3,569) (97)
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Source: SBP
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