EDITORIAL: The Resident Representative of the International Monetary Fund (IMF) in Islamabad Esther Perez Ruiz told Business Recorder that the “IMF expects to field a mission during May to discuss with the authorities policies to further Extended Fund Facility’s seventh review. Engagement remains constructive.”
The expectation is premised on the government meeting the “prior” condition explicitly and unambiguously noted in the one-paragraph IMF press release dated 24 April 2022 subsequent to an agreement reached with the visiting Pakistani team led by Finance Minister Miftah Ismail that “prompt action is needed to reverse the unfunded subsidies which have slowed discussions for the seventh review.”
That condition remains unmet to this day and to further complicate matters a former finance minister who is extremely close to the PML-N leadership stated on a private channel that “we cannot overburden the common people by increasing the prices of petroleum and products…we have to run the country and not ruin it by taking dictations.”
Such comments are extremely unhelpful given the current state of the economy as the next working day after they were delivered, the stock market plunged by 3.23 percent in a single day with stock investors losing more than 228 billion rupees.
At the same time, the rupee eroded by 0.48 percent against the US dollar, (interbank rate) which not only fuels inflation pertaining to all imported items including oil and products, but also raises the amount of subsidy required.
Needless to add, this emotional claim made by a former finance minister completely lacks basic economic rationale: higher subsidies as a consequence of subsidising prices of oil and products by the previous government on 28 February, rightly pointed out as a ‘drone attack’ on the Pakistan economy by not only the incumbent finance minister but also by independent economists, implied a higher budget deficit — a highly inflationary policy.
The question therefore that needs to be asked is whether continuing these subsidies is less inflationary than the (i) rise in the budget deficit; (ii) the deferral of the seventh review talks with the IMF that is contributing to an eroding rupee, again an inflationary policy; and (iii) decline in the stock market reflective of negative market perception with implications on Gross Domestic Product (GDP).
What is also patently evident today is that the IMF is no longer willing to renegotiate the EFF package — be it due to changing geopolitical considerations or the fact that Pakistan has consistently not implemented structural reforms that it agreed to in all the previous twenty-two programmes.
Shaukat Tarin, the outgoing finance minister, tried and failed to renegotiate the terms agreed in 2019 though he too was initially optimistic that he could successfully persuade the Fund to phase out the harsh upfront conditions — a view premised on his earlier engagement with the Fund in 2008.
Pakistan’s economy today is at a crossroads yet again. The budget deficit can be managed by slashing current expenditure, with subsidies a component that can be adjusted easily as other major current expenditure items may not be that easily adjustable particularly debt servicing, defence, pensions and administrative expenses.
True that adjusting subsidies may have serious consequences on the consumer price index, and given the charged political atmosphere today may be an option that the government may be unwilling to take. However, a further delay is likely to have even more serious consequences on the quality of life of the general public in months to come when elections are that much nearer.
The other option is to urge the friendly countries to extend a helping hand, an option the Shehbaz Sharif-led government took as did his predecessor Imran Khan’s; however, while the Khan administration succeeded in getting pledges of over 11 billion dollars in 2018 yet the amount was insufficient to meet the country’s requirements and the IMF’s EFF was subsequently negotiated in May 2019.
A worse situation prevails today with the trade deficit July-April at a historic high of 39.1 billion dollars while the comparable figure for 2017-18 was 30.1 billion dollars. The rollover of present assistance facilities and further assistance by the friendly countries (Saudi Arabia and the UAE), according to reports, was premised on resumption of the derailed IMF programme.
It is hoped that the cabinet would take informed economic decisions with one objective in view — Balance of Payment (BoP) — and not allow political considerations to dictate its agenda. It must shake up the economy before it’s too late.
Copyright Business Recorder, 2022
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