The IMF review

EDITORIAL: The mission leader for the ongoing Extended Fund Facility (EFF) programme revealed during a conference call that Pakistan had not yet approached the International Monetary Fund (IMF) for renegotiation of the ongoing 39-month programme. This question was asked as Prime Minister Imran Khan and Dr Hafeez Sheikh’s likely successor, Shaukat Tarin, publicly stated soon after Sheikh’s removal as the Finance Minister, that there is a need to revisit the conditions agreed on 16 February 2021 on the second to fifth review staff report uploaded on the Fund website on Thursday.

Notwithstanding the fact that total disbursement fell short by 500 million dollars from what was envisaged at the start of the programme subsequent to the staff-level agreement reached on the second to fifth review on 16 February 2021 (the fifth review was scheduled for completion in the July 2019 documents on 5 March 2021) the Fund envisages completion of the EFF as per schedule with the last quarterly staff review scheduled for 2 September, 2022. However, instead of the eight quarterly reviews scheduled in the July 2019 documents the Fund envisages 10 reviews with the next one scheduled on 4 June, a few days before the budget, and every three months thereafter.

The review report rather naively notes that “an upside for growth and programme objectives arises from the political calendar: with the Senate election having taken place in March 2021 there is a window to accelerate reforms until the general elections scheduled for August 2023.” This thesis is based on the Fund projection of the growth rate as follows: 1.5 percent for the current year, 4 percent 2021-22 and 4.5 percent for 2022-23. This analysis does not take account of recent statements by the Prime Minister and Shaukat Tarin for the obvious reason that they were made only after Sheikh’s removal end-March 2021. The expenditure and revenue generation policy measures envisaged in the Fund report have no precedence in Pakistan’s history in the year before elections fuelling intense speculation that the EFF would perhaps be allowed to lapse or deferred till after the elections. It is also relevant to note that inflation is projected at 8.7 percent for the current year, 8 percent next year and 7.3 percent in 2022-23 and surprisingly the Fund cited the January 2021 consumer price index (CPI) of 5.7 percent which was widely considered to be the outcome of motivated jugglery as it did not match the trend in the sensitive price index (SPI) for the month and nor did it match the trend in the previous or the subsequent month.

The envisaged tax revenue rise – from 4.7 trillion rupees in the current year (which has yet to be achieved) to 5.9 trillion rupees next year (a whopping 27 percent rise) on the back of reforms in personal income tax are projected to generate 2.2 trillion rupees next year against 1.78 trillion rupees this year or a rise of 23 percent which appears to be unrealistic. Sales tax is projected to rise from 1.9 trillion rupees this year to 2.56 trillion rupees next year or a 31 percent increase – a tax whose incidence on the poor is greater than on the rich that will almost certainly compromise its implementation. The public sector development programme, an engine of growth in this country, is projected to rise from 503 billion rupees in the current year to 627 billion rupees in 2021-22 to 722 billion rupees in 2022-23, the election year. Add the element of higher tariffs to meet cost recovery (though the Fund has added the element of improving governance and dealing with the circular debt once and for all) and the government would be faced with rising taxes and utility charges coupled with lower development outlay that may well lead to a citizenry up in arms against government measures. And with the withdrawal of incentives from the corporate sector the government is likely to be facing the prospect of electoral defeat if it proceeds with these measures as agreed by the two economic team leaders.

One would have hoped that the Fund had focused on reforms with minimal impact on consumers; or in other words, time-bound conditions should have been placed on widening the tax net instead of continuing to rely on low hanging fruit, on improving governance though administrative measures instead of increasing utility charges to meet full-cost recovery objectives and raised development spending as that remains the main engine of growth in Pakistan today at least till the fallout from the pandemic is finished.

The government has taken some critical studies to deal with long standing issues no doubt with considerable nudging from the Fund and other multilaterals. These include studies on state-owned entities with a view to resolving their issues, a detailed roadmap for eradicating the energy sector circular debt, pension reforms and last but not least the need to merge and target subsidies to ensure that only the vulnerable benefit. However, while previous administrations also focused on several issues facing the country, yet there was many a slip between the cup and lip though one would hope that the Khan administration begins the implementation of the identified reforms which would imply going down in history as having made a difference.

The Fund analysis presupposes that none of the four risks to the EFF it identified would be applicable: (i) uncertainty due to the pandemic which continues to rage not only in our major trading partners but also within the country with the domestic vaccination drive extremely slow and some estimates giving a 10-year timeline to vaccinate for achieving herd immunity; also impacted would be remittance inflows which are at present the major contributors to containing the current account deficit in recent months; (ii) policy slippages which the Fund notes are amplified by vested interests; the government is struggling with bringing these vested interests to book with no visible success to date; (iii) failure to meet EFF objectives due to political tensions as support from the opposition is required to expedite amendments to legislation and to strengthen their implementation including with respect to the Financial Action Task Force as agreed with the Fund; and (iv) geopolitical considerations may raise oil prices and therefore the country’s import bill.

As per the Fund, Pakistan’s financing needs for the year are 27 billion dollars (and this in spite of the debt relief initiative by the G20 countries deferring payments by a year), 23.6 billion dollars for next year, and 28 billion dollars for 2022-23. Interestingly, the government’s team has informed the IMF that it has secured financing commitments from the following bilateral (Saudi Arabia is not mentioned)/multilateral partners: China (10.8 billion dollars), the UAE (2 billion dollars), the World Bank (2.8 billion dollars), ADB (1.1 billion dollars) and Islamic Development Bank one billion dollar. And these financing needs do not indicate the reliance on domestic borrowing by the government that have reached a historical high – from 16.5 trillion rupees in August 2019 to 23.7 trillion rupees by September 2020.

While there are many issues highlighted in the review report yet by far the ones that surely be of most concern for the Prime Minister are the setting of three out of 11 new structural benchmarks: (i) publications of awarded Covid spending-related contracts and beneficial ownership of bidding and awarded legal persons on a centralized website (end April 2021); (ii) establishment of a robust asset declaration system (end June 2021); and (iii) publication of an external audit of the Utility Stores Corporation (end April 2021).

Copyright Business Recorder, 2021