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EDITORIAL: The staff-level agreement with the International Monetary Fund (IMF) was reached in the early hours of 14 July but with the seventh and eighth reviews clubbed together — delayed from the sixth review scheduled seventh review availability date of 4 March 2022 and the eighth review availability date of 3 June 2022, delays that implicate both, the previous administration as well as the incumbent government in dragging their feet to implement the agreed conditions.

As previously publicly stated by Finance Minister Miftah Ismail, at the request of the Pakistan authorities, the 6 billion dollar Extended Fund Facility (EFF) programme was extended till June 2023 (from the scheduled end in September 2022) — a date that would bring it close to the next general elections, if held on time, that, if past precedence is anything to go by, not only compromises the pace of reforms but actually reverses those reforms that have already been implemented.

The Fund also noted an increase in the total programme loan by one billion dollars to 7 billion dollars with 1.17 billion dollars to be disbursed subsequent to Board approval though Ismail while addressing the “Turn Pakistan Around” conference two and a half weeks ago had stated that the country may receive 2 billion dollars.

Ismail also stated during the same conference that Pakistan had received the Memorandum of Economic and Financial Policies (MEFP) from the Fund, a document that details the time bound conditions and structural benchmarks agreed with the authorities before the next review becomes due, an announcement that in hindsight, shows was unwise as it led to a scurry by reporters to access a copy failing which it led to exaggerated speculative stories.

Be that as it may, the Shehbaz Sharif-led government succeeded in convincing the Fund to implement its sasta fuel sasta diesel (SFSD) programme envisaging a one-off transfer of 2,000 rupees to 8.6 million families to “alleviate the impact of rampant inflation” — an amount that has not yet begun to be disbursed.

The Fund also agreed to the 14-07-2022 budgeted allocation of 364 billion rupees for Benazir Income Support Programme (up from last year’s allocation of 250 billion rupees) to not only add one million more families to the BISP network but also to extend SFSD scheme to additional non-BISP lower middle class beneficiaries. BISP has the necessary data, courtesy the detailed surveys carried out during the previous administration, though the incumbent government has yet to announce a mechanism which would enable it to ensure that the cash disbursed is targeted.

However, the mission press release issued by the Fund while acknowledging ‘rampant inflation’ emphasises the need for a proactive monetary policy to guide inflation to more moderate levels citing headline inflation (Consumer Price Index-CPI) exceeding 20 percent in June. Two observations are necessary in this regard.

First and foremost, in Pakistan headline inflation, prior to the ongoing EFF, was not used as a yardstick to set the policy rate, currently at 15 percent; instead core inflation was used (non-food and non-energy) which registered 11.5 percent in June, as unlike headline inflation it is susceptible to discount rate manipulation.

However, the Fund remains obsessed with maintaining positive interest rates and hence CPI is the index of choice. In Pakistan today the policy rate is more than double some of our regional competitors which is almost certainly likely to have a negative impact on Large Scale Manufacturing (LSM) output as it raises the cost of capital which, in turn, would reduce exports, fuelling smuggling across our large porous borders, as well as raise unemployment levels. Thus the Fund’s insistence that the recent monetary policy increase was necessary and appropriate may be so only in terms of conventional economic theory and is not quite applicable to Pakistan — a lapse that is precisely why Pakistan needs some non-IMF trained economic managers.

And secondly, the Fund also stated that greater exchange rate flexibility will help cushion activity (read reduce imports), though that too would impact on domestic inflation given the heavy reliance on imports of petroleum and products, and rebuild reserves to get more prudent levels which maybe so but at the cost of a massive rise in external borrowing — to the tune of 36 to 37 billion dollars as per the Fund’s sixth review documents and up to 41 billion dollars as per Ismail in recent weeks.

The Fund’s observation with respect to weak implementation of the agreed power sector plan is well taken and interestingly it did not mention the failure to import fuel on time as a reason for load-shedding, but instead argued that the circular debt will grow significantly to about 850 billion rupees in FY22, overshooting programme targets threatening the sector’s viability and leading to frequent power outages. Sadly, though the onus of improving the sector’s viability would be on the consumers with the authorities committed to “timely adjustments of power tariff including for the delayed annual rebasing and quarterly adjustments, to improve the situation in the power sector and limit load-shedding.”

The primary surplus agreed by Pakistan for next year is 0.4 percent of GDP which would reduce borrowing underpinned by current spending restraint, (unclear yet where this restraint will be exercised) and broad revenue mobilisation efforts (which needless to add were, contrary to the usual practice, amended during the Finance Minister’s winding up speech) and the provinces have agreed to support the federal government’s efforts to reach the fiscal targets, an obvious reference to the memorandum of understanding signed with the provinces in this regard, though it is baffling it is only Punjab that shows a surplus of 120 billion rupees in its budget.

And finally, there is a note on strengthening governance and the need for a comprehensive review of the anti-corruption measures (including NAB) to enhance their effectiveness in investigating and prosecuting corruption cases. This is being cited by Pakistan Tehreek-e-Insaf as a concern over the recent NAB (National Accountability Bureau) law amendments though in all fairness this may reflect a more pervasive trend where cases against opposition members are actively pursued while cases against those in government summarily dismissed.

The Fund concludes with the observation that “the authorities should nonetheless stand ready to take any additional measures necessary to meet programme objectives, given the elevated uncertainty in the global economy and financial markets,” — an observation that has considerable merit.

Copyright Business Recorder, 2022

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Abdullah Jul 15, 2022 12:55pm
You can argue that monetary policy transmission is perhaps a bit weaker in Pakistan but the fact is that there is still a decent correlation between monetary policy and inflation so monetary tightening was needed. As per SBP, private sector borrowing was 140% higher in FY22 as compared to FY21 while auto financing is still very much at a record high which is evident in the fact that auto sector sales are also at record high. Domestic demand is out of control due to lax monetary policy and this is further shown in the fact that core inflation is 11.5%. Also, I believe LSM especially related to exports (Textiles sector) while not be as affected because SBP is still running favourable schemes for them. The key danger/risk for LSM right now is gas and power outages. Also want to mention that running a primary account surplus is not just important to reduce borrowing but to stabilize debt in Pakistan. If Pakistan's debt to GDP ratio spirals out of control and is not contained, there will no doubt be a risk of capital flight which would be far more harmful to Pakistani people than anything we've observed in history. Of course, growth will be a cost of all this but as SBP and other commentators have said, our growth is consumption-based and too much of it is unsustainable. Bringing growth down is necessary for the time being.
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