An elusive IMF programme

One can say with reasonable confidence that the economic circumstances facing today have no parallel in the history of Pakistan. We are caught in a vicious cycle whose end is not in sight. Hardly have we accomplished a requirement before another shows up and requires the same urgency as for those accomplished.

Consider four examples: i. the most daunting condition before any discussion on the release of International Monetary Fund (IMF) tranche was the elimination of massive subsidies on POL products, which initially the government was reluctant to do. It was finally done and it was extremely painful for the people; ii. then the Budget 2022-23 was unnecessarily out of sync with Fund’s requirements, but before its approval from the Assembly all the required amendments were made including an unprecedented level of tax effort crossing Rs 1 trillion or 1.3% of GDP; (iii) after the budget, the process of imposing petroleum levy (despite making a horrendous POL products price adjustment within the space of couple of weeks) was also triggered; and finally (iv) an action on monetary policy was also done by raising the policy rate by a whopping 1.25% taking it to 15%, highest in more than a decade (Bloomberg termed it a surprising increase). However, none of these heroic efforts was good enough to elicit a word of appreciation and hope from the Fund, much less to expect the elusive staff level agreement.

Before we hold IMF responsible, it may be in order to inquire if there is still some actions required for clinching the deal. Most likely, it is the adjustment in electricity and gas prices that remains to be announced although the subsidy provided along with POL products subsidies was eliminated immediately.

Unfortunately, here again the government has failed to meet the deadline of 1 July. Both decisions have been approved by the Economic Coordination committee (ECC) of Cabinet but electricity action was withheld by the cabinet even at the risk of triggering the mandatory period beyond which the National Electric Power Regulatory Authority (Nepra) determination becomes effective.

The gas price adjustment was announced by the MOS petroleum but the following day he backtracked and denied any increase in gas prices. It seems the government has postponed the announcement of these decisions until after the by-elections are held in Punjab, a case of political expediency.

Can these actions be the result of delay in staff level agreement? It depends on how the Fund perceives the relationship. The reaction of the Fund on the subsidies on POL products announced in March (on the heels of completion of the Sixth Review and the commitments made by the government which were clearly breached) suggests that the level of trust had diminished. Before any serious dialogue, the IMF had asked for the elimination of those subsidies. Now it may be asking for all actions to be completed before even announcing the staff level agreement.

It is clear that the market has not perceived it for anything but a dampener to the nascent recovery in the backdrop of hope of the Fund tranche. Both exchange rate and stock market have reversed their gains they made when hard decisions were taken, thinking they would suffice to meet the IMF approval. The despondency in markets is as acute as it was before the hope was formed.

There have been reports that the tranche has been held up for want of a review of Pakistan anti-corruption laws and submission of an anti-corruption strategy. The Finance Minister has emphatically denied such reports in a tweet on 4 July, asserting that the release of tranche is on track.

Many are wary of this claim as reportedly the MEFP for the joint completion of 7th and 8th Reviews was received in late June. Receipt of MEFP is a major milestone. Normally, it signals a staff level agreement. Even if there are prior actions these are normally kept for completion before circulation to the Board. But as we noted above the trust deficit may have prevented such an announcement.

The fact that the government is not entirely happy from the delay has come from an unfamiliar source. Asked about IMF tranche, Interior Minister Rana Sanaullah, a ranking leader of PML-N, said “the government had even accepted terms which we were not in favour of, therefore the international lender should release the tranche without delay so the country could get out of the difficult situation it is in”. On another occasion, he said: “there will be wrong consequences to weaken Pakistan as it is the frontline state”, adding that “we have danced on IMF tunes and yet the tranche has not been released”. Clearly, this is an indication of government’s unhappiness but the minister may not know all the details of Review completion.

Be that as it may, it is important to underline the significance of the Fund’s tranche and the quantum of work done by a political government which has come to power in the backdrop of tumultuous political changes and has a very a short period of time at its disposal.

The global circumstances surrounding the world have made a number of economies face severe hardships. In a recent report entitled “Historic Cascade of Defaults is Coming for Emerging Markets”, Bloomberg has included both Egypt and Pakistan in the list, notwithstanding the fact that each has recently done an IMF programme or is currently doing one.

The urgency required to avert such a possibility may not escape the Fund. It is Fund’s responsibility to help member countries ward off such head winds. It is particularly so when much of the difficulties facing the country are due to external shocks with little contribution from its policies. The food and energy prices are the leading drivers of social unrest. Pakistan is facing both of them and has so far handled them well. It would not be prudent to put it to more test.

Even if there are few more actions that Pakistan authorities have to take these could be specified as prior actions before Board circulation and staff level agreement announced. This would greatly help to cool down the anxiety in markets and pave the way for orderly resolution of Pakistan’s economic crisis.

Copyright Business Recorder, 2022