EDITORIAL: Talks for the release of the second tranche under the International Monetary Fund's (IMF's) 6 billion dollars Extended Fund Facility (EFF) programme have yet to conclude which must be a source of considerable angst amongst Pakistan's economic team leaders notwithstanding claims of stabilization of the economy and a current account surplus. EFF was formally launched on 3 July 2019, though upfront extremely harsh prior loan conditions were set and implemented from the second week of May 2019 onwards, with the standard proviso that there would be a quarterly review to determine whether the pledged programme conditions (structural benchmarks and time-bound conditions) had been met and if not whether the Fund was willing to grant extensions/waivers.
Fourteen months after the EFF was approved by the IMF Board, the second tranche remains pending. The pandemic whose onslaught in Pakistan began by end March 2020 is being held responsible for failure to meet the programme conditions; however, in December 2019, talks on the second tranche release remained inconclusive though by 24 February 2020 the IMF's website indicated that the staff-level agreement was reached. The Board's approval date was, however, deferred for a month, leading to speculation that prior conditions were again set and agreed by Pakistan's economic team leaders.
Subsequently, the IMF released 1.4 billion dollars under Rapid Financing Instrument to enable the government to deal with the pandemic and stayed discussions on the second tranche release. The second staff-level agreement has not been uploaded on the Fund website as it remains pending to this day, and therefore it is not precisely clear which specific areas of the agreed time-bound conditions the IMF team is unwilling to waive for the release of the second tranche. However, as a guess, one would assume that the performance of the energy sector and the Federal Board of Revenue (FBR) remain sources of serious concern to the Fund.
National Electric Power Regulatory Authority (Nepra), in its state of the industry report 2019, accused: (i) Distribution companies of failing to improve losses and recovery ratios for the past five years urging the government to implement structural reforms by making them independent or through partial or complete privatization; (ii) Pepco is unable to deliver on improvements in the system and reduce the circular debt which requires structural changes; (iii) growth in sales is contracting while cash injections, with interest on borrowed funds passed onto consumers as higher tariffs, provide only temporary relief while the practice of load shedding in high loss distribution circuits also shows short-term gains but with negative impact on sales; (iv) RLNG- based power plants with long-term supply contracts are required to operate in preference over cheap power plants which has compromised an overall economic merit order; and last but not least (v) the practice of over-billing by Discos to cover their inefficiencies. Needless to add, Nepra's own failures in giving high tariffs and ignoring the poor performance of Discos was ignored. The report, however, adds that the "real dilemma of the sector is that due to continued centralized control at every level, the Discos tend to seek shields against any measures, which leads to competition and opening of the sector. It is to be understood by the relevant agencies managing and in control of Discos that new concepts of electricity supply and delivery are being introduced at a fast pace."
Tax to GDP ratio has actually declined to under 10 percent in 2019-20 and this is in spite of the appointment of the third Chairman of the FBR since July 2019. While part of the blame can be attributed to the pandemic especially in the decline in sales tax collections yet failure to implement agreed reforms must be a source of concern for the Fund, including failure to bring the non-filers with the capacity to pay taxes into the tax net.
Now, with PTI having completed two years in government, its monetary and fiscal policies are being held responsible for a sustained contraction in industrial output with a negative impact on GDP growth pre-Covid-19, exacerbated by the pandemic, high rate of inflation and rising unemployment levels with an unprecedented rise in the level of domestic and foreign borrowing. The government's narrative two years into its tenure that the fault lies entirely with the previous administrations is increasingly being challenged by the common man whose income, if he is lucky to have a job, is being daily eroded in the market.
Copyright Business Recorder, 2020
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