What went wrong?

The post-floods growth scenario has become controversial with International Monetary Fund (IMF) and the Asian Development Bank (ADB) at odds with the World Bank projection.

The IMF in its recent update on Pakistan forecast the growth rate for the current year 2023 at 3.5 percent on its website. It is unclear whether this projection was carried out by the Fund staff or in the spirit of harmonization whereby multilaterals pledge to minimise duplication of effort the ADB projection was accepted as accurate.

ADB website claims that floods have been taken into consideration: “Pakistan’s economy is forecast to slow down to 3.5 percent in fiscal year 2023 amid devastating floods, policy tightening and critical efforts to tackle the sizeable fiscal and external imbalances even as growth in fiscal year 2022 is expected to have reached 6 percent.”

The World Bank growth projection is 2 percent, downgraded in the October Update, which appears to be more in synch with the scale of the devastation due to the floods than the IMF/ADB projection. It is baffling why the IMF opted to support the ADB projection instead of the World Bank projection as Damage Needs Assessment (DNA) data is available on the internet – a document prepared under the overall leadership of national and Provincial Disaster Management Authorities (reflecting inter-coordination mechanism at national and provincial levels and district coordination cells in affected areas) and the United Nations Office for the Coordination of Humanitarian Affairs (OCHA) which includes the country team of OCHA, international non-government organizations (NGOs), with national representatives of NGOs as well as IFRC (International Federation of the Red Cross and Red Crescent) and ICRC (International Committee of the Red Cross) observers. This Assessment Working Group led the process of designing and conducting the assessment.

On 13 October, during the IMF/World Bank annual meeting (10-16 October) Jihad Azour, the head of the department dealing with Pakistan, finally acknowledged that “based on this assessment, we will need to update our numbers,” though they have yet to be updated.

In June, July and August 2022 floods and the appalling plight of the 33 million victims was the top news in domestic and international media.

However, the then finance minister Miftah Ismail and the then Acting Governor State Bank of Pakistan, Murtaza Syed (appointed as deputy governor on 27 January 2020 for a three-year term by the Khan administration) failed to raise the issue of this natural calamity leading to a baffling zero mention of the floods in the voluminous seventh/eight review documents uploaded on the Fund website in early September.

The Letter of Intent signed off by these two men on behalf of Pakistan and their acceptance of the harsh upfront conditions contained in the Memorandum of Economic and Financial Policies indicated, at best, an inexplicable disregard for the flood victims and, at worst, criminal negligence.

In a world where pledges are rarely realized, and more so as and when calamities in other parts of the world capture media attention, the two economic team leaders at the time missed the boat for Pakistan as other climate catastrophes overtook international media coverage including the: (i) drought in Somalia with 8 million people facing extreme hunger and more than 213,000 at imminent risk of dying though over 70 percent of the United Nations’ 1.46 billion dollars fundraising target has been met (however some aid agencies claim that they cannot deliver food and water to those who need it the most due to United States counter terrorism legislation); (ii) Nigerian floods with 600 dead, 1.3 million displaced and more than 200,000 homes destroyed with World Food Programme and the UN’s Food and Agriculture Organisation stating that Nigeria was among six countries facing a high risk of catastrophic levels of hunger; and (iii) the world, including major donor countries like the United States and European countries, suffered from the effects of climate change this summer that led to destruction of wide swathes of land requiring diversion of their resources to deal with the crises.

To add to the financial constraints of donor countries is the reverberating effect of the US-led sanctions against Russia (for its invasion of Ukraine) that has led to severe shortages of fuel and grain in European countries (as well as the rest of the world), thereby raising inflation to unbearable levels leading to street protests. The need to subsidize fuel and food for their own people constrain their capacity to support the developing world.

In this milieu the federal Finance Minister Ishaq Dar, during his recent visit to Washington DC to attend the IMF/World Bank annual meeting, no doubt, highlighted the scale of the devastation due to the floods and Pakistan’s inability to meet the associated costs.

Later, Dar stated that he had held constructive talks with the IMF management that initially raised hopes of his success in convincing the Fund staff to ease/phase out the harsh monetary and fiscal policies agreed in the previous review; but these were summarily dashed when the petroleum levy was raised to 47.26 rupee per litre effective 16 October (from the 32.42 rupee per litre effective 1 October to 15 October) – a 46 percent rise that was accepted by the public as domestic fuel prices remained constant as the international price of oil declined; however, the international price is set to rise next month as OPEC+ have announced their decision to curtail output by 2 million barrels a day in November. Thus the decision to even sustain the petroleum levy in November would be politically challenging.

Jihad Azour cautiously stated on 13 October that “based on our discussion with the authorities, we will also listen to them to see what are their priorities, and how the Fund can help. Of course, on the issue of subsidy, as in other parts of the world, subsidy that is targeted to support certain items has proved not to be very effective.

I would say it has proved to be very regressive,” perhaps a reference to Dar’s decision before he departed for the annual meeting to provide electricity at 19.99 rupees per unit to the five export sectors which would amount to a subsidy of 90 to 100 billion rupees.

Shazia Marri, chair of the Benazir Income Support Programme, revealed that Pakistan has disbursed 264 million dollars of cash handouts to 2.47 million – a drop in the ocean in terms of the funds required to replace their lost assets as well as the number of people covered.

What is required in the short-term is for the government to begin a massive reduction of current expenditure, which would create fiscal space and provide some leverage with the Fund.

In the medium term, funds have to be diverted for rehabilitation efforts and not on large infrastructure projects considered a vote gainer by the PML-N; and in the long term one would require politically challenging reforms, particularly in the appallingly run power and tax sectors, that will pay political dividends in the long run, but well past the next elections even if they are held in October 2023.

Copyright Business Recorder, 2022