IMF programme implementation

With the likely passage of the budget for FY22, the Pakistan economy not only enters the second innings of the PTI government but also the second innings of the IMF programme. Both the signatories to the deal, the IMF and the government, are/or will be helpless in implementing the programme in letter and spirit for the following reasons: a) The timeframe is too short, b) Covid-19 continues to dent its speed of implementation, c) PTI has prematurely entered into election mode, d) The PTI government continues to play T-20 economy match on the front foot, while embroiled in playing a political innings on the back foot, e) the dynamics and outcome (implicit or explicit) of likely negotiations between the IMF and the government in the pre- and post-budget environment. Let me elaborate on each of the above briefly.

a) Historically, experience shows that it is very difficult for Pakistan to implement any deep-rooted structural conditions in 36 months leave alone 18 months or till December'22 it has for the current programme. Yes quantitative targets, like circular debt, debt to GDP ratio, fiscal and current account deficit, will show marginal improvements not because of structural reforms per se but partly due to financial/fiscal engineering and partly due to automatic GDP growth. If the Debt Limitation Act passed in 2005 by the legislature turned out not to be worth the paper on which it was printed the very next year, how can you expect the SBP autonomy bill to be enforced in full as an ordinance or part of the finance bill, when the government is in the election mode? In addition to tariff adjustments, the energy sector requires multifaceted structural reforms linked to administration, cross-cutting subsidies, IPPs contracts, technology up-gradation of distribution system and provincial consensus. It is a tall order for 18 months when Senators, MNAs and MPAs and private lobbies are demanding their pound of flesh for support in the next election and even the political ownership for these adjustments is non-existent.

b) Covid-19 continues to throw a wrench in the smooth sailing of the economy. With the 3rd wave almost as bad as the 1st wave, the possibilities of new mini waves cannot be totally ruled out, with upcoming Eid-ul-Azha, Muharram and political rallies. Hopefully, the future waves will be less severe and short due to positive marginal effect of on-going vaccination drive. There are more minuses attached to Covid-19 but some pluses are in terms of more sympathetic views of multilateral donors including IMF, more grants/soft-term loans, less foreign exchange expenditure on travel (also by khepees) and more 'helicopter money' in the form of sectoral tax exemptions, subsidies, packages and planned second-round Ehsaas cash support.

c) In view of the declining popularity of PTI as evident from poor performance in the bye-elections, it has pre-maturely entered the election cycle in a desperate survival mode, earlier than by the governments in previous elections cycles. It has also taken a bigger risk than previous governments as this cycle overlaps with the Part II of the IMF programme. Its' desperation to win the next elections even by a wider margin can be witnessed from unceremonious exit of Dr Hafeez Shaikh, whose presence was proving a political liability and undertaking another round of revolving chairs in the cabinet. How to balance the two goals in terms of desire to win a landslide and meeting quantitative (forget the structural part) IMF targets will remain a challenge for the PTI.

d) Entry of new consumption driven growth-oriented populist finance minister, sitting smugly over more than expected foreign reserves (debt-driven and partly thanks to the negotiating skills of ex-finance minister with multilaterals), rising exports and now unexpectedly higher GDP growth. The government is no mood to withdraw any of the freebies it bestowed in the name of Covid-19 and maybe add few more in the upcoming budget. The new growth figures, even abstracting from manna from heaven agriculture growth and its authenticity, have strengthened government's belief that growth (irrespective of its quality and composition) will only take place with a plethora of incentives, exemptions and handouts ranging from individuals to sectors. The government is also hoping to finance the two-year-long election mode, with automatic increase in revenues from higher imports and GDP. How the tax base with POS technology can be expanded to the unorganized retail level when government is benefiting from consumption-led boom (growth in credit card borrowing, automobiles, cement, mobile telephones and wealth creation strategy) in election mode is beyond comprehension? Interestingly, the growth drivers are very similar to the ones cited by the previous governments to advertise their performance. Moreover, to speculate that the growth in exports is sustainable even close to double digits, one needs to empirically demonstrate that the last 12 months' export growth was through 'trade creation' rather than 'trade diversion'. If the latter is the case, the euphoria over the growth in exports will be short-lived once the pandemic disappears unless it is standing on competitive costs structure (hopefully not hostage to depreciated currency) and productivity gains.

e) Whether the IMF will renegotiate the programme implicitly or explicitly and/or partially or go for its suspension after studying the budget and its public response, depends on a chessboard of moves and possibilities. The recent performance of the economy is one trump card that the government has going into negotiations with the IMF. It will continue to play on the front foot as it is asking for waivers in tariff adjustment and fiscal reforms even before the programme has restarted. In other words it is reluctant to adhere to the signed agreement. Luckily, compliance of the IMF's a priori conditions by the GoP justified its last tranche. As waivers are linked to geopolitics of the USA, Pakistan by requesting for waivers in the upcoming pre-budget discussion meetings, it foresees the reluctance of the IMF to grant such waivers at each future tranche meeting, given the tough optics it is adopting regarding the use of air base. However, India with an implicit nod from the US (if it is desperate or Pakistan's economy shows sign of weakness) may spearhead a wave of border and internal insecurity for twisting Pakistan's arm after the September'21 withdrawal. From an economic perspective, the IMF has been driven to play on the back foot for the time being and would have to wait patiently until the reserves start declining and consumption-oriented growth party is over.

Copyright Business Recorder, 2021