It is indeed extremely disconcerting that the challenges that face Shehbaz Sharif’s government today are only different in terms of intensity rather than substance from those that faced the PPP-led government in 2008, his brother’s government in 2013 and Imran Khan’s government in 2018 - an intensity built up due to sustained failure to implement reforms that all three of the previous administrations had agreed with the International Monetary Fund (IMF) — in 2008, 2013 and May 2019 programmes.
Imran Khan repeatedly stated that one of his regrets was the delay in going on an IMF programme. The question is by how many months did he delay when compared to his predecessors? The Zardari-led government’s prime minister took oath on 24 March 2008 and the IMF Standby Arrangement was approved on 24 November 2008 or a delay of eight months. The total amount of the loan was 7,235,900 (thousand) Special Drawing Rights with only 4,936,035 (thousand) SDRs withdrawn due to programme suspension because of the government’s failure to implement power and tax sector reforms. The reason for the failure: political considerations.
Nawaz Sharif took oath as the prime minister on 5 June 2013 and the country went on an IMF programme on 4 September 2013 or after three months. Needless to add talks with the Fund were already ongoing earlier that year but finalized by the incoming government which may account for the speed of the agreement with the Fund. The programme was completed as scheduled with the amount of the loan agreed and withdrawn amounting to 4,393,000 thousand SDRs. However most of the reforms, particularly with respect to containing the budget deficit, were abandoned in the run up to the 2018 elections.
Imran Khan took oath on 18 August 2018 and the loan agreement began on 3 July 2019 although the staff level agreement was reached on 12 May 2019 with extremely harsh upfront prior conditions. Thus from the day he took oath as prime minister till the time the staff level agreement was reached constituted a period of little less than eight months, about the same time it took the PPP-led coalition government to finalize a programme loan. Would the state of the economy when he left government have been different if the government had gone into a Fund programme earlier? Absolutely not as he had proactively engaged during this time to secure over 8 to 9 billion dollars from three friendly countries, especially as rollover of all pledges for the programme duration was made a precondition by the Fund. However, the blame for the current economic impasse cannot all be laid at the doorstep of the pandemic and the Russia-Ukraine war or on previous governments.
All three previous Pakistani administrations engaged in essentially the same policies as their predecessors — the difference was in the tweaking allowed by the Fund given that all three were on a programme. In the power sector the PPP years were marked by poor performance with serious contractual flaws that favoured the suppliers including contracts with rental power projects. During the PML-N tenure China Pakistan Economic Corridor generation contracts were on the same terms and conditions as contracts dating back to the 1990s and early 2000s that also favoured the suppliers. However, during the past three and a half years circular debt rose from 1.2 trillion rupees to 2.4 trillion rupees, reflecting sustained poor performance.
State-owned entities (SOEs) have required ever larger budgetary injections during the past three tenures though all three governments pledged to the Fund to restructure and/or privatize loss making units.
A tax base that has remained heavily reliant on indirect taxes whose incidence on the poor is greater than on the rich with little progress in widening the tax base as committed to the Fund by all three previous governments.
A persistent challenge which explains the reasons for Pakistan being a perennial IMF borrower is with regards to a recurring current account deficit blamed on pro-growth policies that spur imports of raw materials and semi-finished products which, in turn, fuel productivity; the cost however is a widening trade deficit (with traditional exports sensitive to a global recession/supply) that all but swallows the rising remittance inflows to attain an unsustainable current account deficit. But the silver lining is higher revenue collection. Data suggests that in July-February 2022 revenue rose to 3.799 trillion rupees against 2.916 trillion rupees in the comparable period the year before (an impressive rise of 30 percent), with 52.2 percent of this rise attributable to imports. So if imports are curtailed (projected after the recent contractionary monetary policy interventions including a high discount rate and an eroding rupee) then tax revenue would decline. A catch 22 situation.
Is this really a vicious cycle that Pakistan simply cannot get out of? Not so. An October 2021 World Bank study titled Pakistan Development Update: Reviving Exports focused on some valuable export promotion recommendations including: (i) gradually reduce effective rates of protection through a long-term tariff rationalization strategy to encourage exports; the 1 March 2022 industrial incentive announced by the previous prime minister does the exact opposite notably gave more incentives to industries/exporters as well as an amnesty to investors, barring a few sub sectors; (ii) reallocate export financing away from working capital into capacity expansion through long term financing facility; (iii) consolidate market intelligence services by supporting new exporters and evaluating the impact of current interventions to increase their effectiveness – and here it is worth noting that administration after administration has adhered to standard normal fiscal and monetary incentives without doing an empirical study on their effectiveness which may partly be due to the same faces heading ministries from one administration to another. This approach has led to the survival of the most influential in the industrial/export sectors: and (iv) design and implement a long-term strategy to upgrade productivity of firms that fosters competition, innovation and maximizes export potential.
In addition to get out of this cycle would require slashing the need for borrowing for budget support (as opposed to repayment of debt, debt equity and swap arrangements already incurred) – external and domestic. This requires cutting expenditure. The easiest and quickest expenditure to slash is subsidies but at present this will have serious and perhaps an immediate negative political fallout for the 10 plus party coalition government. Shehbaz Sharif has therefore astutely kept the petroleum and products subsidy announced by his predecessor exactly seven weeks ago in place, at least for the next fifteen days but instead has allowed for fuel adjustment charges on electricity tariffs (which were frozen by Imran Khan under his relief package). However, as per Bloomberg, the success of the seventh review that would secure money from not only the Fund (3 billion dollars remaining under the ongoing programme) but also other multilaterals and bilaterals “could hinge on the new government’s ability to raise energy prices, removing subsidies put in place by Khan. It’s a step that would signal “good housekeeping”, according to SBP Governor Reza Baqir.
While it is too soon to talk of how much to cut Public Sector Development Programme (PSDP) – it’s already been cut by 200 billion rupees to 600 billion rupees - one would assume that further disbursements would be delayed till after the budget. Be that as it may, the severe contractionary monetary policy in place today will dampen growth as would a decrease in PSDP, and consequently projected tax revenue targets will not be achieved.
And finally, there is a need to renegotiate the IMF programme for economic and political reasons which are all the more acute for the coalition government. Is that possible? Kenneth Akintewe, head of Asian sovereign debt at ABRDN in Singapore, argues in the Bloomberg report that the “market will see if the IMF will relax some of its demand given some of the external risks are more acute than before.” And that must be the main argument put forth by the government authorities.
To conclude, the task at hand is to go back on the Fund programme as pledged multilateral and bilateral assistance is premised on its continuation. To cite the growth rate as the only relevant macroeconomic indicator does not present a true picture (one must take into account the base which has been low in Pakistan and globally due to the pandemic and the Russia-Ukraine war) and other associated indicators including debt to GDP ratio, revenue to GDP ratio, budget deficit and inflation require a focus.
Copyright Business Recorder, 2022
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