EDITORIAL: The World Bank in its latest publication “Food Security Update” awarded Pakistan the dubious title of experiencing the second highest consumer price inflation in the South Asian region - 45.1 percent in February 2023, trailing Sri Lanka’s 54.4 percent.
While there is talk of a possible default by Pakistan until and unless the stalled ninth review of the ongoing International Monetary Fund (IMF) is declared a success with the Cabinet members repeatedly assuring the public that an agreement is imminent as all prior conditions have been met. Yet, a comparison with Sri Lanka’s experience may be enlightening.
On 20 May 2022, the 30-day grace period to dish out 78 million dollars of unpaid interest on debt expired for Sri Lanka, with the central bank Governor Nandalal Weerasinghe stating: “our position is very clear, we said that until they come to the restructure [of our debts], we will not be able to pay. So that’s what you call pre-emptive default. There can be technical definitions... from their side they can consider it a default.
Our position is very clear, until there is a debt restructure, we cannot repay.” Subsequently, negotiations began for a 2.9 billion dollar IMF bail-out package which prompted a tweet from the Managing Director of the IMF dated 7 March 2023: “I welcome the progress made by Sri Lankan authorities in taking decisive policy actions and obtaining financing assurances from all their major creditors including China, India and the Paris Club. Look forward to presenting the IMF-supported Programme to our executive Board on March 20.”
Contrast this statement by Managing Director (MD) IMF’s statement to Deutsche Welle on 19 February 2023: “What we are asking for are steps Pakistan needs to take to be able to function as a country and not get into a dangerous place where its debt needs to be restructured. I want to stress that we are emphasising two things.
Number one, tax revenues. Those who can, those that are making good money, public or private, need to contribute to the economy.
Secondly, to have a fairer distribution of the pressures by moving subsidies only towards people who really need it. It shouldn’t be that the wealthy benefit from subsidies.” It is relevant to note that MD IMF’s comment on restructuring of debt by Pakistan is considered a foregone conclusion by independent domestic economists, given our much higher external debt obligations relative to Sri Lanka’s (interest payable as well as principal as and when due) with our foreign exchange reserves of around 4.3 billion dollars on 9 March 2023 accounting for less than a month’s imports.
Be that as it may, while Prime Minister Shehbaz Sharif in his recent interactions with media has explicitly stated that all IMF prior conditions have been met, yet these conditions fall far short of the sentiments expressed by the IMF MD though perhaps not on the agreed quantitative measures on two major counts: (i) the money bill introduced in parliament is projected to generate the 170 billion rupees additional revenue agreed with the Fund and would continue into next year.
However, it does not widen the tax net but disturbingly raises existing rates of indirect taxes whose incidence on the poor is greater relative to the rich; and (ii) subsidy on electricity to exporters estimated at 110 billion rupees was withdrawn, however, the rise of 40 billion rupees in the 360 billion rupee budgeted Benazir Income Support Programme is hardly likely to ensure protection of the growing number of poor with 45.1 percent inflation rate.
The social protection factor of the present government continues to be compromised not only due to the raise in tariffs and taxes as prior conditions of the IMF (constantly cited as the only reason by the government) but also by seriously flawed policies of our economic team leaders that include borrowing heavily from banks (thereby crowding out private sector borrowing leading to negative 4.4 percent Large-Scale Manufacturing growth), pumping borrowed money back into the economy for current as opposed to development expenditure, thereby raising the debt servicing component of the budget with a consequent raise in the budget deficit, which is a highly inflationary policy. There is, therefore, a dire need for out of the box thinking rather than persisting in implementing these flawed policies.
Copyright Business Recorder, 2023
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