EDITORIAL: The International Monetary Fund (IMF) board approved the 3 billion dollar Stand-By Arrangement (SBA) to Pakistan on 12 July, a standard outcome subsequent to reaching the staff-level agreement (29 June 2023).
The three upfront bullet points in the press release issued by the Fund are telling. The first highlights the SBA objectives from the Fund’s perspective, which are overstated given the state of the economy today and the nine-month duration of the programme.
Thus, while the SBA will support immediate efforts to stabilise the economy and guard against shocks, in other words, avert the looming default, yet the claim that it would create the space for social and development spending to help the people of Pakistan is unlikely to materialise within the next nine months.
The revised budget, revised as a prior SBA condition, envisages a rise in budgeted revenue from 9.2 to 9.4 trillion rupees with the earlier target premised on GDP growth of 3.5 percent (which the Fund downgraded to 2.5 percent and that too after downgrading the government’s claim of plus 0.3 percent growth last fiscal year to negative 0.5 percent), import growth of 8.9 percent in dollar terms (which necessitated the 23 June withdrawal of administrative restrictions by the State Bank though their implementation is not possible due to paucity of foreign exchange reserves), and a rise in current expenditure in the revised budget uploaded on the Finance Division website from the 9 June budget documents – from 13.319 trillion rupees to 13.344 trillion rupees in spite of claiming an 85 billion rupee reduction.
It is unlikely that the increase of 13.8 billion rupees for social protection in the revised budget will be enough to provide for the growing numbers being pushed below the poverty line (due to concomitant SBA conditions including raising utility rates, petroleum levy) and a rise in Benazir Income Support Programme from 450 billion rupees to 466 billion rupees.
Any further rise in the discount rate, with the Fund press release noting that an appropriately tight monetary policy aimed at disinflation must continue, that may well increase the budgeted borrowing costs as the government remains the largest borrower in the market, with private sector credit shrinking by over 80 percent last fiscal year compared to the year before. A higher budget deficit may well translate into higher inflation.
The second bullet point reiterates serious concerns over the implementation of flawed policies, or missteps as earlier stated by the Fund, dating back to end September early October 2022.
The press release notes that steadfast policy implementation will be critical for Pakistan and include greater fiscal discipline (no doubt a not so oblique reference to the 110 billion rupees subsidy to exporters announced on 6 October last year), a market determined exchange rate to absorb external pressures (rather than continuing to control the interbank rupee-dollar parity with disastrous consequences on remittance inflows through official channels estimated at around 4 billion dollars last year).
And the Fund urges further progress on reforms to the energy sector (hopefully long-term that would tackle poor governance rather than passing on the buck to the consumers), climate resilience (though climate change division has been budgeted 4050 million rupees in the current year as opposed to 4073 million rupees in the revised estimates of last year) and business climate, which is likely to continue to be held hostage to a high policy rate and an eroding rupee value vis-a-vis the dollar.
The release of 1.2 billion dollars would be immediate while two other successfully completed quarterly reviews will lead to disbursal of the remaining two tranches.
If the reviews are held quarterly then the next one will be due mid-October, which will be undertaken either with the caretakers or deferred till after elections, though it is unlikely that the programme will be derailed for two reasons: (i) barring the incumbent, no finance minister since 2019 has violated the agreement with the Fund (though there have been waivers and digressions due to Covid-19 and floods) with the Managing Director statement referring to “uneven policy implementation under the Extended Fund Facility combined to halt the post-pandemic recovery, sharply increase inflation and significantly depleted internal and external buffers”; and (ii) the caretakers do not have the mandate to amend/alter any of the SBA conditions.
What is unprecedented in the press release is a long statement by the Managing Director of the IMF, appreciating the implementation of all prior conditions, though without their implementation the SBA would not have been approved, and emphasising the need to accelerate structural reforms which may be taken as a warning as without these politically challenging reform measures, the country may well find itself back in the uncomfortable position of facing default with inability to access any external borrowing source (be it from friendly countries or multilaterals/bilaterals, borrowing from the foreign commercial banking sector or issuing debt equity).
Copyright Business Recorder, 2023
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