IMF talks: there’s now rising sense of deja vu?

The finance team in Islamabad is walking a tight rope. Promises made by the government to the International Monetary Fund (MF) on fiscal and energy targets have not convinced the Fund to change its tone and tenor. Increasingly, 2021 is giving a sense of déjà vu. Will we see a replay of 2018-19?

After the Pakistan Tehrik-e-Insaf (PTI) came to power in 2018, IMF conditions were not as tough initially during pre-programme negotiations. But the then Finance Minister, Asad Umar, wanted even easier terms. The delay worsened balance of payment (BoP) situation to the point that by May 2019, a more frontloaded and tougher programme had to be signed by a new finance team.

Once again, macro stresses are building up, and it won’t be too long before falling reserves will begin making the administration uncomfortable. The IMF may eventually embrace Pakistan as it is the lender of last resort, but on much tougher conditions. And the country is in no position to leave the Fund. It is better to tread with care and have a realistic growth and fiscal plan.

Shaukat Tarin and team must realize that this programme is different from what Pakistan had in 2008 or 2013. The finance team appears to be re-living nostalgia of their past experiences. But it seems to have forgotten that the debt to GDP level at that time was not as alarming, the circular debt cancer was not at an advanced stage, and geopolitical situation was still in Pakistan’s favour. This programme is more like what Pakistan had received in 2000. Debt to GDP levels (over 80%) is similar to pre-War on Terror era. Geopolitics is not very different either. At that time, the programme was frontloaded and tough. So is the case today.

The political and economic situations were different in 2008 or in 2013. In 2008, the public debt to GDP was at 57 percent of GDP. Energy circular debt was miniscule in comparison to where it stands today. Pakistan had adequate fiscal capacity. Moreover, the party in power had international diplomatic support as it had lost its leader to terrorism. The programme was relatively relaxed, and Pakistan received several waivers.

In 2013, Pakistan went to the IMF just to obtain cheaper loans and build reserves as current account deficit was a mere 1.1 percent of GDP (versus 6.1% of GDP in FY18). Politics was in Pakistan’s favour. Over the course of that programme, the country was able to obtain record waivers. Fiscal situation was much better – debt to GDP was 64 percent, while circular debt had not spiraled out of control.

By 2018, circular debt had become much larger. Repayments for China Pakistan Economic Corridor (CPEC)-related projects led to a balance of payment crisis. Moreover, Pakistan was unable to isolate itself from the US-China trade war. As a result, a much tougher programme was offered in which waivers were hard to come by.

The finance ministry must appreciate that conditions are not in Pakistan’s favour, so they must not stretch their luck. The tailwind gained from Covid-19 is disappearing. Moreover, the window of opportunity to carry on structural reforms is closing as election year comes closer. The boom due to low interest rates, higher remittances, and debt rescheduling is not going to last forever. The team needs a reality check. They must think and introspect, and not commit to targets which are unachievable.

Budgeted fiscal revenues are elusive. Energy circular debt plan without increasing prices is unrealistic. The government must pick its battle. Either do something on revenues or on energy tariffs. It is best to have realistic revenue measures. With growth in imports and a better economic momentum, 15 percent growth in FBR revenues is achievable. To reach 25 percent, new taxes will have to be imposed. Gas tariffs must increase, although increasing electricity tariff from current levels is not viable at present. It is better to give up room in other areas so efforts can be diverted to circular debt reduction without increasing tariffs.

The finance team must appreciate the ground realities. At 7 percent policy rate, the team is wishing for 5 percent GDP growth. It is preferable to increase discount rate by 50-100 basis points today to avoid IMF pressure for steeper increases later. If that happens, the IMF may ask for rolling-over of long-term debt, which will have to be issued at higher rates. In 2019, majority of domestic long-term debt was issued at peaking rates, which will mature in 2021 and 2022. The incumbent Finance Minister has publicly criticized those measures in the past. Yet, they may have to be repeated if the IMF comes knocking.

Bottom line is that Q-block (finance ministry) is gambling away gains from recent fiscal consolidation too early into the game. The planned fiscal expansion could have waited until the election cycle began in 2022. Asian Development Bank (ADB) and the World Bank (WB) loans have already been delayed. At this stage, Pakistan cannot afford to exit the programme. The country’s finance team must work on offering a realistic growth outlook. Otherwise, the IMF will call the ‘bluff’ and the finance team may have to face the music within a few months.

Copyright Business Recorder, 2021