The forthcoming IMF review

The 9th review of the IMF (International Monetary Fund) Programme is due shortly. It will represent an appraisal by the IMF of the economic outcome in the first quarter of 2022-23. This will include an assessment of the extent of adherence to the performance/continuous criteria, indicative targets, and structural benchmarks.

The date indicated for commencement of the review was the 3rd of November. The process may initially be undertaken remotely from Washington. The likelihood of a visit soon by the Staff Mission has probably been diminished by the political events likely to take place in Islamabad.

The fundamental problem with the review is that Pakistan has been hit in recent months by the devastating floods. It is indeed surprising that although the seventh and eighth review report came out on the 1st of September and the impact of the floods had become visible, there was no mention of the floods in the report and no adjustment made to the projections for 2022-23 considering the negative impact of the natural disaster.

The finance minister has since been to Washington and held talks at the highest level with the IMF. Some concern has been expressed by the IMF on the loss of life and widespread damage inflicted by the floods.

The commencement of the ninth review should ideally first lead to agreed adjustment to the annual targets for 2022-23 considering the floods. Clearly, the following changes will need to be made:

(i) Upward revision in the current account deficit in the balance of payments for 2022-23. The likely fall in rice and textile exports and increase particularly in wheat and cotton imports should lead to an upward revision at least in the deficit target from $9.3 billion to $12 billion.

(ii) The level of relief expenditures and other subventions in support of the flood affected people and the loss of growth in revenues due to the slowdown of the economy ought to be reflected in an appropriate upward adjustment in the size of the budget deficit from 4.9% to, say, 5.5% of the GDP and a corresponding reduction in the primary surplus for 2022-23.

A review of the actual macroeconomic outcome in the first quarter of 2022-23 reveals the likelihood of divergence from the original projections. First, the GDP growth rate will be significantly lower than the growth rate projected of 3.5%. It is more likely to be in the range of 1.0% to 1.5%, due to the big losses in agricultural output and the emergence of a negative growth rate in the large-scale manufacturing sector in the first two months of 2022-23.

Second, the IMF has projected an inflation rate of 19.9% in 2022-23. However, the inflation rate has averaged 25.5% in the first four months. Food prices have gone up by as much as 31.6% and this is mostly the result of supply shortages that have emerged due to the floods. A more likely projection of the rate of inflation in 2022-23 is from 22% to 24%.

Turning to the likelihood of achievement of the performance criteria for end-September 2022, the big divergence first is likely to be in the level of net international reserves. The IMF had anticipated that the level of SBP reserves would rise from $9.8 billion at the start of 2022-23 to $16.3 billion by end-June 2023.

However, the opposite has happened in the first quarter. Reserves have fallen by almost $2 billion to the low level of $7.9 billion as of end-September. This has happened despite a relatively small current account deficit. IMF’s assumptions about the inflows of foreign funds into Pakistan have been overoptimistic. It is indeed a sad reflection of the credibility of an IMF programme that even during its presence there has been downgrading of the borrowing country’s credit rating to near default level.

The recently released fiscal operations data by the Ministry of Finance indicates that there was actually a primary budget surplus of 0.2% of the GDP in the first quarter. It is much better than the target by end-September of a primary deficit of 0.4% of the GDP. FBR revenues have performed well and contributed to a primary surplus.

Some new bones of contention have apparently come up. The IMF is unhappy about the lower electricity tariff to exporters which could cost over Rs 120 billion in 2022-23. Also, the recent agricultural relief package announced by the Prime Minister may create some discomfort in the IMF.

In particular, the SBP appears to be back to being a subsidiary agency to the Ministry of Finance despite its newfound autonomy. Also, an understanding had been reached that there would be no concessionary refinancing in future. This has been brought back in the agricultural package. However, it is essential to view the package as a necessary input to the process of revival of agriculture in the flood-affected areas of Pakistan.

There are probably other structural conditionalities which have not yet been implemented. These include lack of full increase in the petroleum levy on HSD and in the power tariff as envisaged. Also, the law on SOEs (state-owned enterprises) has not yet been passed. However, the IMF will no doubt appreciate the exit of Pakistan from the FATF (Financial Action Task Force) ‘grey list’.

The impending IMF review is of considerable importance. Successful completion of the review will improve international perceptions of Pakistan and facilitate an increase in external inflows, which have tended to dry up in recent months. We hope that for once the IMF will show a true ‘human face’ and help Pakistan emerge from the worst natural disaster in its history. Any inordinate delay in completion of the review will badly impact on the markets.

Copyright Business Recorder, 2022