Pakistan & Argentina: two economic scenarios

“On July 28, the Argentine authorities and IMF staff reached a staff-level agreement on the combined fifth and sixth reviews under Argentina’s 30-month Extended Fund Facility (EFF) arrangement. This agreement is subject to approval by the IMF Executive Board, which is expected to meet on August 23 to unlock the agreed disbursements”—Statement by the IMF Spokesperson on Argentina – August 2023

Faced with multiple economic challenges, Argentina is actively working to overcome its most pressing financial difficulties.

Despite formidable challenges, it completed Fourth Review of International Monetary Fund (IMF) Extended Fund Facility (EFF) programme on March 31, 2023. This resulted in the prompt disbursement of US$ 5.4 billion (equivalent to SDR 4 billion). Argentina and IMF formally entered EFF arrangements amounting to SDR 31.914 billion (approximately US$ 44 billion or 1000 percent of the quota) on March 25, 2023.

Injection of US$ 5.4 billion was seen as a sign of relief for a struggling economy. Hopes were high that the nation would concentrate on executing the agreed-upon agenda with the IMF.

However, an unprecedented drought caused a heavy blow to the struggling economy and the country missed its Fifth Review which was due in June 2023. Media reports suggest that the drought resulted in a loss of US$ 20 billion in terms of commodity exports.

As a consequence it affected the country’s primary exports, particularly of soybeans, wheat, and corn—major contributors for earning foreign exchange. Moreover, prices of everyday items surged by 102 percent, affecting people’s purchasing power. It is anticipated that the drought is likely to create a gap of approximately US$5 billion in Argentina’s export revenues.

As of now, Argentina is facing a monstrous inflation rate of 142.4 percent, while the policy rate is 118 percent. In this context, the local currency exchange rate against the dollar has risen significantly, surpassing 350 pesos per dollar.

The agreement between the IMF and Argentina calls for implementation of stringent fiscal measures aimed at boosting revenue. These measures include imposition of new taxes on accessing foreign exchange for imported goods and services, as well as introduction of strategies to enhance export liquidity to counterbalance, and reduce export duties due to the drought’s impact.

Additionally, Argentina is to exercise fiscal discipline by reducing expenditures and containing the wage bill’s growth. It also needs to revise energy tariffs to ensure alignment with energy costs.

The IMF has also emphasized the need for Argentina to enhance control through more precisely targeted social assistance and rationalization of current transfers to provinces and state-owned enterprises. It appears that Argentina’s difficulties will linger on for a longer period of time.

Policy reforms and tightening monitory policy, imposition of taxes, and revision of energy tariffs will further accelerate inflation increasing the cost of doing business, which has already severely affected the economic woes of ordinary citizens.

In a parallel scenario, Pakistan is encountering comparable economic predicaments. Both nations have struggled to launch fiscal reform. This gap is narrowing through a conventional approach, burdening existing taxpayers with new taxes and levies, and escalating energy costs. Unfortunately, both the governments have yet to take effective measures to stem the outflow of resources.

Pakistan’s failure to fully adhere to and implement the agreed-upon agenda led to the premature exhaustion of its Extended Fund Facility Programme signed with the IMF in July 2019. Consequences of this lapse and subsequent violation of the programme’s conditions resulted in a surge in inflation, which exceeded 38% overall in May 2023, reduced to 29.4% in June, and was recorded at 28.3% in July 2023 while food inflation for urban areas for the same months was recorded at 48.1%, 40.8%, and 40.2%, respectively.

However, figures for food inflation in rural areas for the same period were high and recorded at 52.4%, 41.5%, and 41.3%, respectively.

During the final days of his tenure, the then Prime Minister, Muhammad Shehbaz Sharif, successfully negotiated a 9-month Stand-By Arrangement (SBA) of US$3 billion with the IMF. This broke the deadlock persisting with the IMF since the conclusion of Seventh and Eighth Reviews of the EFF programme in September 2022.

While the initial tranche of SBA, amounting to US$ 1.2 billion was disbursed to Pakistan in July 2023, release of the two remaining installments is contingent upon a positive review of IMF’s conditions.

Following completion of the National Assembly’s term and departure of Shehbaz Sharif-led government, the caretaker prime minister has assumed office on August 14, 2023 and discussions are under way for his cabinet. It is anticipated that the caretaker government will be fully functional within the next few days.

Though the primary responsibility of caretaker government is to ensure timely, fair, and transparent elections by the constitutional ethos, it also bears the added burden of managing state affairs, which includes fiscal stability. It is worth noting that the upcoming review of IMF’s SBA is set to take place during the caretaker government’s tenure, to secure the subsequent installment.

However, the caretaker government faces its most daunting challenge in executing the reform agenda, which includes initiatives such as enhancing governance, maintaining market-based exchange rates, measures for building climate resilience, tackling the issue of circular debt, which stands at more than Rs 2.3 trillion, curbing inflation, stabilizing the current account deficit, and refining governance of state-owned enterprises (SOEs) to gain IMF’s approval for the subsequent tranche release.

However, it is important to acknowledge that most of these measures necessitate adequate time and cannot be fully implemented within the caretaker government’s tenure.

The caretaker government’s primary emphasis will thus be on adopting a conventional approach to generate revenue to bridge fiscal gaps. Even before formation of the cabinet, prices of petrol and diesel have already been raised by more than Rs 17 and Rs 20, respectively. This decision is likely to push inflation upwards, in contrast to the anticipated decrease in the upcoming months.

Moreover, the surge in petroleum product prices will also reverberate across the energy sector, potentially leading to an escalation in electricity costs. Apart from the hike in petroleum and electricity prices, current policy rate, already at 22%, may be further increased to fulfil IMF’s requirement.

The above actions collectively indicate that we are following a trajectory similar to that of Argentina, with a commitment to deviate from policy reforms and shifting the burden of governmental insufficiency onto existing taxpayers and the general public by raising taxes and prices of everyday commodities.

However, if this trend persists, our currency’s value relative to the dollar may not differ significantly from that of Argentina’s even though we are fast approaching the psychological threshold of Rs 300 per dollar. Reports suggest that Pakistan has not managed to maintain the agreed-upon 1.25% gap between inter-bank and market-based rates. Unless corrective measures are taken, the currency’s devaluation will continue, potentially leading us to a situation similar to that of Argentina’s.

Time is ripe for all stakeholders to direct their focus on holding free and fair elections on time. This would enable the future elected government, imbued with the mandate of Pakistanis, to take the reins and promptly initiate efforts toward implementing the reforms agenda.

Recognizing the significance of these matters sooner rather than later is imperative. Failing to do so could potentially endanger our national security, as managing the affairs of the fifth-largest populous country through bilateral and multilateral loans, carries substantial risks for our survival.

(Huzaima Bukhari & Dr. Ikramul Haq, lawyers, and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of the Pakistan Institute of Development Economics (PIDE). Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023