EDITORIAL: During the early hours of Friday, Pakistan time, the International Monetary Fund (IMF) released its detailed report on the seventh/eighth reviews with significant deviations from the projected in the budget macroeconomic indicators.
At the outset it is important to note that the combined review does not take account of the devastating floods and hence projections of key macroeconomic indicators are, without doubt, considerably overstated. The Fund’s projections are also at variance with the budgeted pre-flood projections. Gross Domestic Product (GDP) is projected to rise by 3.5 percent in the current year against the government target of 5 percent though of course farm output has been severely impacted due to the floods which, as a major input to manufacturing, will also negatively impact on industrial output.
If the GDP growth rate is not achieved then other targeted indicators as a percentage of GDP are unlikely to be met and with the additional negative impact of the floods, the following projected targets in the Fund report are highly unlikely to be achieved, including defence (1.9 percent from last year’s 2.2 percent), subsidies 1.1 percent against last year’s 2.3 percent, federal tax revenue (8.9 percent against last year’s 9 percent) and provincial revenue of 0.3 percent — the same as last year.
Current account balance (or perennial imbalance), the primary reason for going on the twenty-third Fund programme, is projected to decline to negative 9.3 billion dollars in the current year against negative 17.5 billion dollars last year with exports projected to rise to 35.9 billion dollars this year against 31.8 billion dollars in 2021-22 and imports to decline from 72 billion dollars last year to 68.7 billion dollars.
In other words, the current account balance is targeted to narrow down to 2.5 percent of GDP this year down from last year’s estimated 4.7 percent of GDP on the back of, one may assume, extremely tight monetary, fiscal and energy policies (read contained subsidies with the government already having decided to restrict the subsidy on tariffs for export-oriented industry to three months — August to October — instead of the entire year) consistent with moving demand to sustainable levels and supported by continued commitment to market-determined exchange rate.
The report mentions the government violating Performance Criteria on: (i) banning import of luxury items which has been partially lifted other than on cars, cell phones and household appliances; and (ii) SBP requirement seeking payment authorisation before initiating transactions for importing certain goods with approval granted in a discretionary manner with the pledge that it would end by end August. Disorderly currency market conditions were feared if the decision to maintain an exchange rate restriction resulting from limitation of advance payments for imports against letters of credit and up to a certain amount per invoice for import of eligible items is not continued till “complementary macroeconomic policies have not fully kicked in.”
The circular debt stood at 2.25 trillion rupees end-June with the flow much higher than envisaged under the circular debt management plan adopted by the cabinet in March 2022 missing “more than threefold the related end-June 2022 indicative target under the programme…acute cash flow strains have resulted in substantial power outages in recent months”.
Inflation budgeted at 11.7 percent has been upped to 19.9 percent; however, the Fund report highlights the contingency measures agreed by Finance Minister Miftah Ismail-led economic team in the event of any one of the four identified fiscal risks coming into effect which would raise the hackles of the general public.
The risks are comprehensive and include: (i) government’s ability to raise projected revenue from a number of novel taxes; (ii) staggered petroleum levy implementation (with 90 percent to be generated from October onwards); (iii) provincial commitment to deliver the historically high surpluses (with not only Punjab and Khyber Pakhtunkhwa likely to renege on their signed pledge to the federal government as Sindh and Balochistan are even more badly affected by the floods); and (iv) significant containment of current spending relative to GDP in a pre-election year, a target unlikely to be met, given the items where spending cuts are envisaged are not major contributors to this item, including a ban on purchase of furniture and cars, avoidable travel and curtailing electricity use by 10 percent.
The contingency plan that Ismail has agreed to is premised not on quarterly but monthly data, showing signs of underperformance against programme revenue targets — an underperformance that is a given after the floods — that would trigger an immediate increase in General Sales Tax on fuel as a prelude to reaching the standard 17 percent, streamlining GST on sugary drinks (60 billion rupees) and other unwarranted exemptions such as those benefitting exporters (already curtailed to three months as noted above).
The other areas of concern for the IMF include the appalling performance of state-owned entities (SOEs), an uneven playing field for SOEs and private companies, corruption and red tape remaining a drag on productivity, investment and development of a vibrant private sector.
Though an initial flood damage assessment has been made yet Pakistan’s economic forecasting remains a challenge till a clearer picture emerges after a final assessment of the damage has been released and therefore one may assume that the ninth review of the Fund would deal with the floods and its aftermath that would almost certainly require a revisit of the agreed harsh conditions.
Copyright Business Recorder, 2022
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