The Stand-By Arrangement (SBA) documents uploaded on the International Monetary Fund (IMF) website this Tuesday past, 18 July, added monetary policy miscalibration to the risk assessment matrix – missing from the matrix released on the seventh/eight review of the Extended Fund Facility (EFF) dated August 2022, the twenty-third programme acquired by Pakistan.
During the previous twenty-two IMF programmes SBP held the reputation of promptly implementing IMF conditions – prior or subsequent to reaching a staff level agreement on the programme or a quarterly review.
This promptness was possible for the apex bank because as a statutory entity so declared under the 1956 Act it did not face the prospect of any political or public backlash for its decisions which, in turn, could be taken relatively easily and quickly (including those pertaining to adjusting the discount rate and the external value of the rupee) in marked contrast to the politically challenging reform agenda required of the government.
This trend continued till the appointment of the incumbent finance minister who had vehemently opposed the apex bank’s autonomy bill passed by parliament on 28 January 2022, saying that it is tantamount to “undermining national sovereignty”.
The passage of the 22 January bill was an IMF prior condition for reaching a critical staff level agreement on the EFF, critical from the perspective of the economy, was disregarded by the finance minister who claimed at the time that the issue was one of failure to negotiate in the country’s interest rather than one of being presented with a fait accompli – a claim whose veracity has been demolished since his own appointment as the country’s Finance Minister on 27 September 2022 with all ensuing IMF statements/documents referring to ‘missteps’ and ‘uneven implementation’ as the root cause of high inflation, foreign exchange reserve crisis and almost all other poorly performing macroeconomic indicators today.
The Fund’s indictment of monetary policy lacking clarity and mis-calibration was, as per its recent report, evident from its decision to keep the policy rate unchanged in Monetary Policy Committee meetings in August, October and early June but hiking rates in November, March, April and last June.
The matrix notes: “amid high economic uncertainty and volatility, central bank’s slow monetary policy tightening or pivot to loosen monetary policy stance prematurely, de-anchoring inflation expectations and triggering wage-price spiral in tight labor markets.”
The rise in inflation is no doubt also attributable to the massive rise in current expenditure - from the IMF approved budgeted 8.6 trillion rupees for 2022-23 to 10.28 trillion rupees by fiscal year-end or a 20 percent rise with flood related relief to the victims no more than around 5-0 to 60 billion rupees - funded largely by inordinately heavy borrowing from the domestic market; and the jury is out whether the massive wage rise announced in the budget for state sector employees was the outcome of the impending elections or was triggered by inflation – a rise which left private sector employees hostage to the negative 0.5 percent growth for the outgoing year.
In this context what is baffling is that the Fund has projected/approved current expenditure at 19.23 trillion rupees in the current year – federal 14.64 trillion rupees and provincial 4.59 trillion rupees – with no more than 60 billion rupees additional for the Benazir Income Support Programme.
The Fund notes that the authorities “have been relatively sanguine about inflationary pressures quickly receding and returning to their 5-7 percent inflation target range by end FY25.” This is certainly accurate as nearly every Monetary Policy Statement has noted the attainment of this desirable inflation range in the medium term (a target date in the distance that few would challenge at present).
The SBA report further notes that “Staff emphasized that the SBP will need to continue its tightening cycle to re-anchor expectations given the inflationary pressures are expected to persist over the coming year, including because of the impact of exchange rate corrections will continue to reverberate in the economy,” and added that the “SBP agreed to maintain a tight monetary policy stance – higher rates and prudent use of liquidity injections – as needed, given incoming data, to achieve real positive interest rates, on a forward looking basis.”
And again a first for the Fund the report emphasises the need for improving the monetary transmission and the monetary operation framework defined in a footnote as ending the two largest refinance schemes (EFS and LTFF) with commercial banks allowed to extend credit to export industries at preferential rates supported by an on-budget subsidy (included in the current budget) to be administered via export import bank and obtain liquidity at market rates via SBPs regular open market operations instead of refinancing at below market rates as is currently the case.
The SBP has committed to not introducing new refinancing schemes to keep the outstanding credit to refinancing facilities below their current limits.
The matrix cites the expected impact of these miscalibrations as follows: (i) lower demand for exports after tightening of the policy, (ii) tighter external financing conditions; and (iii) stock market deterioration.
The policy response the matrix notes must be: (i) to allow market determined exchange rate to cushion shocks instead of controlling the interbank rate – a policy that led to a 4 billion dollar fall in remittance inflows last year as the difference between the interbank and hawala/hundi rate was allowed to rise to over 30 rupees.
To ensure compliance the Fund added the structural benchmark of the interbank and open market premium remaining within the range of plus minus 1.25 percent range on average during any consecutive five business day period; (ii) build fiscal and external buffers, and sadly the focus today is not on widening the tax net to include those outside the net but on external buffers read borrowing from multilaterals and bilaterals; (iii) implement structural reforms to anchor confidence and improve competitiveness (again a source of concern as there is no evidence of reforms to date other than to pass on the entire onus of achieving full cost recovery onto the consumers instead of improving sectoral inefficiencies); and (iv) maintain an appropriate medium term debt strategy and maintain financial stability to weather external shocks, tighten supervision to monitor banking risks. And here one would hope that the six banks found guilty of currency speculation last fiscal year are finally penalized as pledged by Jamil Ahmed earlier this year.
While the SBP lifted all administrative restrictions on dollars on 23 June as a prior SBA condition yet it is relevant to note the statement made during the IMF Board meeting on behalf of Pakistan: “Pakistan authorities have requested temporary approval of exchange rate restrictions considering the limitation on advance payments for imports against Letters of Credit” — till scheduled programme end on 12 April 2024.
Thus while post-staff level agreement on the SBA roll-overs and borrowings have upped the reserves to 8.7 billion dollars as of 14 July, a fact that accounts for Dar appearing in front of cameras in the absence of reporters, yet all restrictions have not, nay could not, be lifted immediately given the demand for the greenback.
To conclude, many hold the incumbent finance minister responsible for IMF’s indictment of SBP actions while in his own defense he cites the SBP 2022 autonomy act; however, the fact remains that Pakistan needs qualified economic team leaders - Finance Minister and central bank Governor — who would resolutely resist pressure to derail signed covenants with creditors and would rather walk away than succumb to pressures.
Copyright Business Recorder, 2023
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