There is considerable uncertainty as to the specific/precise time-bound conditions and structural benchmarks signed-off by Pakistan’s economic team leaders - Finance Minister Dr Hafeez Sheikh and Governor State Bank of Pakistan (SBP) Dr Reza Baqir – on behalf of the people of this country with the International Monetary Fund (IMF).
The IMF press release dated 16 February 2021 uploaded on its website acknowledges that “IMF staff and the Pakistani authorities have reached an agreement on a package of measures to complete second to fifth reviews of the authorities’ reform program supported by the Extended Fund Facility (EFF)… The Covid-19 shock has required a careful recalibration of the macroeconomic policy mix, the reforms calendar, and the EFF review schedule.”
The economic team leaders have been silent on the details though Dr Hafeez Sheikh tweeted the same day at 7:10pm: “I would like to thank the Prime Minister for his guidance, and all my colleagues and the IMF staff for their support; this is a good development for Pakistan.” Given that during his previous tenure as the country’s finance minister Sheikh thanked his driver, a public servant, during his budget speech for driving him to parliament to present the budget, perhaps his 16 February statement reflects his gracious nature. Be that as it may, one would assume that Dr Hafeez Sheikh has shared the details of the agreement with the cabinet and got the Prime Minister’s approval before agreeing to ‘harsh’ prior conditions with the Fund team – a view prompted by the fact that no Board date has yet been scheduled to approve the staff-level agreement.
Awareness of the IMF conditions agreed by the economic team leaders is critical given that the political leadership is unsuccessfully grappling with severe criticism of the government’s handling of the economy particularly with respect to inflation and a dramatic rise in household costs/industrial input costs due to: (i) gas shortages attributed to failure to import on time, though the LNG deal signed with Qatar on Friday past is a step in the right direction; (ii) raising electricity tariff and the price of petroleum and products that is attributable to failure to improve sectoral performance and to meet the shortfall in revenue agreed with the Fund; and (iii) a revised tax target of 4.7 trillion rupees, against the budgeted 4.9 trillion rupees, expected to stifle economic activity.
In the July 2019 IMF document four elements were noted that echo concerns subsequently voiced by independent economists: (i) “forecast errors for primary balance and inflation have been large in the past and often on the optimistic side”. In this context it is relevant to note that the reduction in the January consumer price index is neither rationalized nor credible; (ii) maturity of public debt was of a shorter duration - in March 2019 57 percent of domestic public debt had a maturity of less than a year up from 54 percent in June 2018; the economic team leaders have lengthened the maturity since though the applicable interest on the debt has risen; (iii) strong fiscal consolidation is required to resolve public debt sustainability. Tax collection for 2019-20 was set at 5.5 trillion rupees, a target considered unrealistic in July 2019 and rendered all the more unrealistic post-Covbid-19. This year the Fund has agreed to a lower target of 4.7 trillion rupees against the budgeted 4.9 trillion rupees though Federal Board of Revenue sources claim a realistic target is 4.5 trillion rupees; and (iv) the Fund was assured sustained support by “friendly” countries during the 39 months of the programme however the situation that has evolved since is ever rising reliance on swap arrangements with China/commercial banks, debt creating inflows, though not shown as liabilities in the SBP accounts. The insistence by the Prime Minister that his administration has paid off debt incurred by previous administration is not supported by facts as domestic debt has risen from 16.5 trillion rupees in 2018 to 23.7 trillion rupees in September 2020 and external debt has risen from around 93 billion dollars in 2018 to over 118 billion dollars today.
The question then becomes how should we take Dr Hafeez Sheikh’s “good development” remark? In this context it is relevant to note that the staff-level agreement on the EFF was reached on 12 May 2019 and five days later, on 17 May 2019, Sheikh during an interaction with the media along with Governor Sindh, Shabbar Zaidi, the then FBR chairman, Faisal Vawda and Ali Zaidi categorically stated that the deal with the Fund had nothing to do with the already settled National Finance Commission (NFC) award - and reaffirmed this stance during a subsequent Senate session. This claim was contrary to the very last sentence in the press release issued by the Fund dated 12 May 2019, “To improve fiscal management the authorities will engage provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Financial Commission;” and restated in the 8 July 2019 agreement uploaded on the Fund website after Board approval: “stronger institutional arrangements will be required to ensure the sustainability of the envisaged fiscal consolidation. To this end, and in the context of the ongoing National Finance Commission Award, the federal and provincial governments will seek to make progress on measures aimed at better rebalancing inter-governmental relationships and improve inter-provincial horizontal equity.”
It increasingly appears that Dr Hafeez Sheikh has not focused the administration’s attention on the tenth NFC award’s (2010) numerous positive features notably: (i) raising the tax to GDP ratio by one percent every year, a realistic target that would have expanded the pie enabling the federal government to generate sufficient resources to meet its expenses; (ii) to support the 18th Amendment clause notably that a new NFC not be less than the previous one to mitigate the possibility of angst within smaller provinces that could have contributed to civil disturbances – a serious concern during martial law when the share of the provinces was reduced from 50 percent to around 40 percent; (iii) ignoring resources from non-tax resources plus petroleum levy which are not part of the divisible pool; and finally (iv) to acknowledge that the centre’s share is not appreciably lower than before the seventh NFC (2010) award if one adds the federal government’s request to provinces not to impose zila and octroi in return for an additional 3.75 percent from the Centre’s share of the divisible pool. One would have hoped that Sheikh had supported the seventh NFC award on merit to his current cabinet colleagues which in turn would have strengthened the federating units trust in the Centre as envisaged in the award.
The serious issue of remaining on the Financial Action Task Force’s (FATF’s) grey list and lack of effective implementation of money laundering laws was also dealt with in the July 2019 IMF documents. The Fund notes on its website that it “is contributing to global AML/CFT efforts in several important ways. As a collaborative institution with near universal membership, the IMF is a natural forum for sharing information, developing common approaches to issues, and promoting desirable policies and standards. The Fund has dedicated AML/CFT expertise. Two departments carry out the IMF’s AML/CFT efforts: the Monetary and Financial Systems Department and the Legal Department.” Here too the finance ministry must clarify to the cabinet the possibility of suspension of the Fund programme in the event that the FATF time line, extended till June 2021, is not adhered to.
And finally the Finance Minister has repeatedly extolled the reduction in expenditure by the Prime Minister’s House, the Presidency as well as of some ministries however while these efforts are appreciated yet they are merely optics as the percentage allocated under these heads is too little to make a difference. The only reduction in the current year’s budgeted expenditure is courtesy G-20 Debt Relief Initiative which deferred payment of debt for one year to enable the poor countries to deal with Covid-19. The budget deficit remains unsustainable, a highly inflationary policy.
To conclude, one would hope that Dr Hafeez Sheikh shares details of the agreement with his cabinet colleagues and the general public before the Fund uploads the agreement on its website after its Board approval thereby enabling those affected to be better prepared as implementation begins.
Copyright Business Recorder, 2021
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