EDITORIAL: Prime Minister Shehbaz Sharif, two days after the budget was presented, once again expressed optimism on striking a deal on the ninth review, stalled since November 2022, with the International Monetary Fund (IMF).
A day earlier, Federal Finance Minister Ishaq Dar, during the traditional post-budget press conference referred to the possibility of debt rescheduling with bilateral partners not multilateral partners (which would necessitate being on a Fund programme), while publicly referencing geo-political factors for the stalled ninth review.
The two men have consistently maintained that all pre-conditions to the stalled ninth review have been met and refer to decision taken on 27 January 2023 when the interbank rupee-dollar parity was decontrolled, and decisions taken in February this year that include measures to generate 170 billion rupee additional revenue as well as raising utility rates (power and gas) to achieve full cost recovery as proof positive.
However, it is telling that two days before the budget was tabled in parliament, on 7 June, the Resident Representative of the IMF in Islamabad stated that Pakistan authorities had been informed that “there can be one remaining Board meeting under the current Extended Fund Facility at end-June…to pave the way for a final review it is essential to restore the proper functioning of the foreign exchange market, enact fiscal year 24 budget consistent with programme objectives, and secure firm and credible financing arrangements to close the 6 billion dollar gap ahead of the Board meeting.”
These three concerns were restated after the budget documents were shared with the Fund, reportedly at the Prime Minister’s insistence, and indicate that the Fund does not share the Prime Minister’s or the Finance Minister’s claim that all pre-conditions have been met. The reasons are conclusive.
First, the differential between interbank rupee-dollar parity and the open market/hundi/hawala rate is again widening, and the recent comment by Ishaq Dar that he does not support depreciation has reinforced Fund’s/economists’ concerns that the interbank rate is not market-based which, no doubt, has widened the trust deficit between the Fund and Dar still further.
Second, the budget has been an exercise in futility as it will be unable to generate the resources required domestically given the overly optimistic assumptions to generate the 9 trillion rupees - import growth of 8.9 percent with less than 4 billion dollar reserves, average exchange rate of 290 rupees to the dollar, inflation of 21 percent which registered at 38 percent in May and large-scale manufacturing growth of 3.6 percent when it registered negative 8.1 percent July-April this year.
Around 19 billion rupees is budgeted from external sources under the head other aid with friendly countries (Saudi Arabia, United Arab Emirates and China) accounting for time deposits of 10 billion dollars with foreign loans; and repayment budgeted for next fiscal year at 15 billion rupees.
With respect to China it is necessary to point out that while Pakistan remains a strategic partner, yet, China has increasingly engaged in bailout packages to avert default in the borrowing country to rescue its own banks – and it needs reminding that China has in recent months officially expressed deep concerns over Pakistan’s failure to meet its contractual obligations with respect to the Independent Power Producers set up under the China Pakistan Economic Corridor umbrella.
The remaining 9 billion dollars is envisaged to be sourced from external commercial bank loans, 4.5 billion dollars, and IMF and eurobond/sukuk 3.9 billion dollars – inflows that will be dependent on a comfort level that can be provided by either being on a Fund programme or upgrading of the country’s rating by the three international rating agencies that continue to place Pakistan in the junk status category.
Current expenditure, a highly inflationary policy given the GDP growth of 0.3 percent, was raised in the revised estimates from the budgeted amount in the outgoing year by a whopping 40 percent and is budgeted to rise by 32 percent in the forthcoming year compared to the revised estimates of 2022-23, reflecting the preponderance of profligacy rather than substantiating claims of austerity.
And finally, Dar intimated that the government will talk to bilaterals to reschedule, roll over deposits and provide additional deposits. This would require a revisit of the stated position of Saudi Arabia and China that they will work through multilateral entities to provide assistance to ensure that reforms are adhered to.
Neither the budget 2024 nor the 170 billion rupee February mini-budget and nor the upgrading of tariffs indicate the implementation of structural reforms especially in the two worst performing sectors for decades - power and tax sectors – has been initiated.
The administration continues to rely on massive subsidies to the power sector, untargeted as they are not channeled through the Benazir Income Support Programme with verified beneficiaries, sustained focus on raising revenue through higher taxes on existing tax payers rather than on widening the tax net, legitimizing non-filers by allowing them to pay a higher withholding tax (in the sales tax mode which is an indirect tax whose incidence on the poor is greater than on the rich) while passing on the buck of poor power sector performance on the hapless consumers.
It is imperative for the administration to acknowledge that 2023 has little in common with 2017 particularly with reference to not only the subsequent policy revisions by the Fund Board, including the harmonization of policies with other multilaterals notably the World Bank and Finance Action Task Force, but also Pakistan’s seriously eroded leverage with respect to phasing out harsh upfront conditions given our consistent failure to implement structural reforms and engage in patently flawed economic policy decisions, an example being artificially controlling the rupee dollar parity especially at a time when reserves are not even enough for a month’s imports.
Copyright Business Recorder, 2023
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