EDITORIAL: Senior officials of the Ministry of Finance in an interaction with select beat reporters revealed that the International Monetary Fund (IMF) has linked the resumption of the 6 billion dollar thirtynine-month Extended Fund Facility (EFF) programme effective 1 July 2019 to a "clear" time-bound action plan of power tariff adjustments/amendments in National Electric Power Regulatory Authority (Nepra) for quarterly tariff adjustments, mobilization of taxes and State Bank of Pakistan (SBP) autonomy. These conditions are stipulated in the EFF documents with time-bound pledges by the Pakistan's economic team leaders - Dr Hafeez Sheikh, Advisor to the Prime Minister on Finance and Dr Reza Baqir, Governor SBP - pledges that had remained unmet till end January 2020 that led the IMF to declare in a press release uploaded on its website that a staff-level agreement on the second quarterly review was reached on 27 February 2020. However, the press release added that "the agreement is subject to approval by the IMF management and consideration by the Executive Board, which is expected in early April. Completion of the review will enable disbursement of SDR 328 million (around US$450 million)." The lack of a firm Board date/more than one month delay in taking the agreement to the Board, a prerequisite for the tranche release, was viewed by skeptics as contingent on the implementation of a number of 'prior' conditions agreed with the Pakistani economic team leaders.
Covid-19's onslaught in Pakistan began in March and as stated by the Ministry of Finance officials, the IMF was in the forefront of extending assistance through approval of the 1.4 billion dollar Rapid Financing Instrument the following month in April 2020. The assessment of the Fund with respect to Covid-19's impact on the economy as per RFI documents was "urgent Balance of Payment needs of about US$ 2 billion (0.8 percent of GDP) in Q4 2020 that, if not addressed, could result in severe economic disruptions. Similarly a potential financing gap of around $ 1.6 billion could emerge in FY 2021." The Pakistan government succeeded in acquiring over 2 billion dollars in the fourth quarter of the outgoing year from multilaterals, including the RFI, and is likely to meet the financing gap of 1.6 billion dollars for the year starting 1 July 2020 through domestic and external borrowing.
In effect, the IMF does not reckon any significant shortfall in funds subject of course to the government meeting its budgeted revenue targets - 4.9 trillion rupees as Federal Board of Revenue (FBR) target, 501.3 billion rupees from other taxes (mainly petroleum levy to generate 450 billion rupees) and non-tax revenue of 1.1 trillion rupees (with SBP profits to account for 620 billion rupees). The Fund would legitimately be concerned about the pledge to raise 4.9 trillion rupees by the FBR given that the budget for the current year envisaged 50 billion rupees worth of tax relief measures, no new taxes were announced and that too with a projected growth rate of no more than one percent.
The finance officials noted two major concerns with respect to expenditure - the rising pensions (estimated at 470 billion rupees) and subsidies. In this context, it is relevant to note that the rise in annual pensions is disturbing - it rose from the 342 billion rupees budgeted in 2018-19 (with revised targets adhering to the budgeted amount) to 421 billion rupees in the budget 2019-20 (with revised estimates placing the total at 463 billion rupees) and 470 billion rupees has been budgeted for pensions in 2020-21. The officials stated that those dealing with pensions have pledged reforms and computerization which would hopefully deal with this issue once and for all.
Subsidies have been drastically reduced in the current year - especially for the power sector from 201 billion rupees in the revised estimates of last year to 124 billion rupees this year however it is grants and transfers (including the 200 billion rupees for Benazir Income Support Programme and contingent liabilities of 323 billion rupees) that have been raised by 12.5 percent in the current years.
Power sector reforms continue to be stalled and unfortunately pledges made in the first review report of the EFF have still not been met particularly the pledge to impose surcharges, that did not get parliamentary approval, tackling arrears in the power sector which have escalated to 2 trillion rupees, and the regulatory benchmarks remain un-assessed.
SBP reforms too remain stalled however the RFI while acknowledging the Covid-19 related measures maintained that "SBPs proactive liquidity and credit support initiatives should shore up activity and safeguard financial stability. Nonetheless, given Pakistan's limited fiscal space and remaining vulnerabilities, enacted support measures must be targeted and temporary, focusing on the immediate health spending needs and protection of the most vulnerable, while preserving long-term sustainability. In this context, the authorities must decisively press ahead with the reforms included in the EFF as soon as the immediate crisis pressures subside."
Construction industry initiatives, designed to jump-start the economy, supported by the Fund through agreeing to an amnesty scheme for investors till end 31 December (at odds with our pledge to the Financial Action Task Force) is floundering because in spite of the reduction in the excise duty on cement, its price is rising. There is no doubt that the poor and vulnerable in Pakistan, like in other countries of the world, are paying a very heavy price due to the pandemic; however, the pandemic has also provided the economic managers with a reprieve in terms of not only citing the pandemic as the only source of curtailment of economic activity in the country (a view that sadly seems to have been accepted by the Prime Minister) but also in trying to convince the multilaterals, particularly the IMF, that it is the pandemic which is solely responsible for delays in implementing the agreed time-bound conditions. The chickens, however, seem to have come home to roost as talks on the second IMF tranche release remain pending reflective of serious differences. If talks remain stalled or the programme is suspended then this would not be the first time that the IMF suspends its programme.
Copyright Business Recorder, 2020
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