EDITORIAL: Talks with the International Monetary Fund (IMF) are continuing as planned and the two sides remain engaged on a regular basis at a technical level through virtual meetings and data sharing, as per a press release issued by the Ministry of Finance.
The timeline on the seventh review was as follows: seventh review talks began on 4 March 2022 as per schedule noted in the sixth review documents dated November 2021 but Board approval for the tranche release was deferred till Pakistan had complied with prior conditions including the passage of two extremely controversial bills from parliament notably withdrawal of around 323 billion rupee exemptions and granting autonomy to the State Bank of Pakistan (SBP).
The usual practice in the Fund’s quarterly reviews is to begin with technical level talks with specific sectors take around two weeks or so. These include the poorly performing sectors which in Pakistan’s case are energy and tax sectors which had agreed to undertake extremely challenging time-bound quantitative reforms as well as to meet structural benchmarks. Technical level talks precede policy level talks that are held with Pakistan’s economic team leaders — Finance Minister Shaukat Tarin and Governor SBP Dr Reza Baqir.
There is a general consensus amongst independent economists that the Prime Minister’s 28 February 2022 relief package and the 1 March industrial package were being considered by the fund as a blatant violation of the sixth review agreement.
A government handout has noted that “on the relief package complete details including financing options have been shared with the IMF and a general understanding has been developed. The IMF has, however, indicated the need for some further discussions on the industrial promotion package over the next few days. An understanding is expected to be developed on the said package subsequent to those discussions.
” The use of the word “understanding” — general or expected — is not definitive by any stretch of the imagination to reaching a consensus on the seventh review for two reasons. First, the relief package envisages higher subsidies and therefore higher current expenditure that is not yet quantifiable as it is to be applicable till 30 June 2022 which defeats the purpose of the December 2021 withdrawal of exemptions bill approved by the assembly. And secondly, while the industrial package also envisages extending exemptions yet more disturbingly it also grants amnesty to industrial investors, barring a few industries, which is opposed by the IMF not only on the grounds that it acts as a disincentive to honest taxpayers but may also be resisted through its pledge to work in conjunction with the tasks set by Financial Action Task Force (FATF) for Pakistan’s removal from the grey list.
As repeatedly pointed out by us in these columns, Pakistan has little, if any, leverage with the Fund to either renegotiate terms or phase-out the politically challenging conditions as was patently evident in the delay in reaching a consensus on the sixth review talks that were only ironed out after the government completely yielded to the Fund’s insistence on meeting its programme conditions agreed at the start of the programme as well as in reviews one to five. The recent two packages announced by the Prime Minister to help him cobble waning public support due to the persistent high inflation of the past three and a half years have no economic basis and are designed to enable him to better meet his surmounting political compulsions which are unlikely to sway the Fund.
So the crux of the problem is simple. As the Prime Minister seeks to check inflation by extending more subsidies, he is fuelling inflation by injecting money into the economy not backed by higher output. His claim that revenue (tax collections) have risen which will fund his relief package is not quite accurate as higher collections at par with the upward revised 6.1 trillion rupee tax target against the budgeted 5.8 trillion rupees would be undermined given that: (i) more than 52 percent of collections during the first eight months of the current year are from imports which are now being contained by the SBP by using the eroding rupee as a shock absorber; and (ii) the decline in the petroleum levy collection from the budgeted 610 billion rupees to less than 120 billion rupees, which is greater than the rise in the revenue. Once the current political impasse created by the no-confidence motion that the prime minister is faced with in the National Assembly is resolved, the government of the day, whosoever it may be, would have to seriously revisit these two packages for the seventh review consensus to be reached.
Copyright Business Recorder, 2022
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