The International Monetary Fund’s report titled “Fiscal Monitor: a fair shot” appears to be, at best, coincidental and, at worst, a deliberate rejoinder to recent calls for a revisit to its 2019 Extended Fund Facility (EFF) programme design by Prime Minister Imran Khan and Hafeez Sheikh’s successor, reportedly Shaukat Tarin, who publicly stated that he is not in favour of abandoning the programme but supports a recalibration of conditions based on the intensity of the third Covid-19 wave.
The second to fifth review report uploaded on the Fund website on Thursday did not take account of the changing of the team at the Ministry of Finance or the recent calls for a revisit of the programme and when asked whether Pakistan has approached the Fund for renegotiations the mission leader, on a conference call, responded in the negative.
The Fund’s fiscal monitor report did not, as the report heading clearly indicates, focus on some of the obviously flawed monetary policies post-12 May 2019 when the staff-level agreement was reached on the EFF till March 2020 when Covid-19 struck the country. These policies as forecast by the Fund stifled economic activity leading to unemployment – expected outcomes as Gross Domestic Product (GDP) growth for the year was projected at 1.5 percent by the Fund for the first year of the programme. The World Bank in its recent report titled ‘Pakistan Development Update’ notes that for stabilization maintenance of a market-based exchange rate is required.
The IMF second to fifth review report however notes that “despite some easing of existing exchange restrictions and multiple currency practices (MCP)” no doubt to deal with the pandemic aftermath – a charge denied by the State Bank of Pakistan (SBP) which maintained that “we have refrained from introducing or intensifying exchange restrictions, MCP or import restrictions for balance of payment measures.” In addition, the Fund urged the government to ‘’unwind” the measure taken by SBP allowing banks to lower their reserve requirements as an incentive for doubling to 5 percent the share of their lending portfolio to housing and construction sector out of concerns for financial stability and efficiency, an exhortation that is likely to go unheeded as it is Prime Minister Khan’s signature policy measure.
Sadly though neither the IMF’s consolidated reviews nor the World Bank report called for the SBP to undertake an analysis on the rupee misalignment two years into the programme – an activity that the Fund undertook during the previous EFF (2013-16) two years into the programme as independent domestic economists had raised concerns about the rupee over-valuation that consequently resulted in a historically high current account deficit of 20 billion dollars. Be that as it may, the Fund’s calculation of the overvaluation at the time was unsatisfactory given the wide range - between 5 to 20 percent. Today there are concerns of a significant under valuation of the rupee with implications on the budget deficit and one would hope that the Fund team takes cognizance of the matter as the SBP team is unlikely to given that its website notes that “for an assessment of a country’s exchange rate misalignment a more sophisticated analysis is required talking into account factors such as demographics, external and fiscal sustainability and some other macroeconomic fundamentals.”
The World Bank report further noted that the “monetary policy is expected to remain accommodative in the near term with future adjustments in the policy rate targeting a gradual return of medley positive real interest rates.” Thus 7 percent, considered high in comparison to other regional competing countries (India 4.25 percent, Bangladesh 4.75 percent and China 2.25 percent) is not being termed accommodative with the World Bank maintaining that “in March 2020, longer-term expectations signaled lower interest rates, resulting in a largely downward sloping yield curve. However, these expectations have recently changed, leading to the reversion to a normal upward sloping yield curve in January 2021. This indicates that interest rates are expected to increase over time, making borrowing for longer-term investments potentially more expensive. As upward-sloping yield curves are typically associated with periods of positive economic growth, this reversion to a normal yield curve is consistent with the ongoing economic recovery.”
Be that as it may, the recent data released by the IMF bears thinking with respect to claims by our economic team leaders. The claim persistently made by Dr Hafeez Sheikh and Dr Reza Baqir has been that the economy has stabilized with the Prime Minister faithfully parroting this claim. The World Bank however notes that “the current account deficit is projected to gradually widen as domestic demand picks up and international trade recovers. Export values are projected to decline in fiscal year 2021 amid weak global demand, whereas import values are projected to grow in line with the recovery in domestic economic activity. However, the current account deficit is projected to narrow to 0.8 percent of GDP, as a wider trade deficit is more than offset by stronger remittance inflows. The current account deficit is projected to gradually widen to 1.7 percent of GDP in 2023, with import values growing alongside domestic demand and higher projected oil prices.” Sustainability of the trade deficit is therefore in question and if remittance inflows due to geopolitical considerations, a risk cited by the IMF in its report, decline then the current account deficit will widen. However, the IMF projects remittances to steadily rise from 26 billion dollars in the current year to 30.8 billion dollars in 2022-23, the election year.
If stabilisation is defined as containment of the historically high current account deficit of 20 billion dollars inherited by the Khan administration then stabilization has been achieved but this has been at the cost of, as per the World Bank data: (i) an additional 5.8 million falling under the poverty line or a 2.3 percent increase in poverty. While the World Bank has laid the entire blame on the pandemic yet its data is based on simulation results measured at the official poverty line that may reflect (i) the policy of our economic team leaders post-pandemic of laying the entire blame for poorly performing key macro-economic indicators on the pandemic – a ploy used to divert attention from their own flawed policies; (ii) contrary to our own data suggesting that the pandemic’s attack in rural areas was considerably less severe the World Bank claims that results of “simulation exercise indicate that the absolute increase in poverty in rural areas is expected to be similar in magnitude if not even larger than the one predicted in urban areas.” This may be indicative of the farm sector being ignored by the Khan administration’s economic team leaders as indicated by the persistent sugar and wheat crisis; and (iii) to increase competitiveness and stimulate private investment will require amongst other factors “improving business sentiment and supporting competition to promote exports” with the report further noting that “economic activity is projected to be dampened in the short term by fiscal consolidation measures associated with the resumption of IMF stabilization programme.” The short term is not defined for reasons to perhaps do with later deniability – the standard normal operating procedure of bureaucrats – international and domestic. In addition the projected rise in the discount rate by the World Bank is likely to dampen private investment interest.
Growth rate is projected at 1.5 percent this year and 4 percent next year with inflation at 10 percent in the current year and 7.9 percent next year. The estimates for next year are almost certainly over optimistic as it is assumed that neither of the four assumptions noted in the Fund report would impinge on the implementation of the EFF: (i) containment of the pandemic domestically and in countries of our major global trade partners; (ii) slippages due to vested interests; (iii) failure to achieve objectives due to unrealistic targets as has been evident throughout the ongoing programme as well as the eruption of spontaneous protests due to the steady and unchecked erosion of the rupee value; and (iv) geopolitical considerations notably the rise in the price of oil for example.
Copyright Business Recorder, 2021
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