EDITORIAL: First things first, prime minister Shehbaz Sharif has clearly stated that the country needs another International Monetary Fund (IMF) programme to revive the country’s beleaguered economy.
On March 20, the IMF mission announced a staff-level agreement (SLA) on the second and final review of the nine-month-long Stand-By Arrangement (SBA) on its website through a press release, as is the usual practice.
It took six days to reach the SLA, assuming that discussions continued during the weekend, and subject to approval by the IMF’s Executive Board the final tranche of 1.1 billion dollars will be disbursed late April. While the disbursement may appear small change given that the Governor State Bank of Pakistan (SBP) revealed in December 2023 that the country is scheduled to pay 24.6 billion dollars in foreign debt and its servicing by the end of June this year - which includes a rollover of 12.4 billion dollars which he claimed has been confirmed by creditor nations.
It is important to note that the country was rudely awakened to a disturbing element of bilateral/friendly country assistance since 2019: that without being on an active IMF programme no friendly country funding/rollovers, even if pledged, would be forthcoming. In other words, the final disbursement would unlock credit lines for borrowing from bilateral and other multilaterals.
What the government is hoping for is that the SLA would lead to the three international rating agencies improving Pakistan’s credit rating which would open up the gateway to affordable borrowing from commercial banks abroad as well as through incurring debt equity through issuance of Sukuk/Eurobonds.
The press release is significant on two counts. First; the SLA recognised the strong programme implementation by the SBP and the caretaker government. In the past, the reference was more general, to Pakistan authorities, rather than separately mention the SBP and the government.
In this context, it is relevant to note that while SBP has a long history of adhering to agreed conditions yet notwithstanding the passage of the central bank autonomy law in January 2022, from 27 September 2022 till the time the SBA SLA was reached on 29 June 2023, the then finance minister, Ishaq Dar, reportedly pressured the SBP to abandon the market-based exchange rate agreed with the Fund (and a 110 billion rupee power sector subsidy) that led to the suspension of the Fund programme.
The Fund’s insistence that maintaining prudent monetary policy (discount rate) would lower inflation needs an urgent revisit as other more potent contributors to persistently high inflation in Pakistan are: (i) the focus on primary deficit (target 401 billion rupees in the current year) as opposed to budget deficit may have contributed to the massive rise in government borrowing from the domestic market, a highly inflationary policy as well as one that has crowded out private sector borrowing, thereby impacting negatively on growth potential) that is pumped right back into the economy to fund ever-rising current expenditure; (ii) failure to check monopolistic conditions prevailing even in those markets where the suppliers and buyers are too large in number to impact on prices through allowing associations to be formed that, at present, wield tremendous political clout; and (iii) profiteering even at the level of a small moveable retail outlet (cart) based on the sellers’ perception of what a prospective client can pay. It is critical for the IMF to undertake a study or subcontract one that would determine the causes of inflation impacting on the vulnerable and the poor.
Second; the Fund noted that “Pakistan’s economic and financial position has improved…growth is expected to be modest this year while inflation remains well above target and ongoing policy and reforms efforts are required to address Pakistan’s deep-seated economic vulnerabilities amidst ongoing challenges posed by elevated external and domestic financing needs and an unsettled external environment.”
While this statement certainly covers all bases, with some independent economists terming this as typical bureaucratic butt covering, yet one would have hoped that instead of merely stating that the government should “create space for higher priority development and social assistance spending to protect the vulnerable” the Fund had noted the persistently high inflation during the duration of the SBA, which no doubt has raised the poverty levels from an existing disturbing high of 40 percent (partly due to administrative measures required by the Fund which can be justified from an economic standpoint) but had the gumption to accept its own design flaw in approving the budgeted current expenditure with no mention of pension reforms.
Promoting private-led activity is yet another Fund mantra that, without in-depth research of each entity destined for privatisation would backfire particularly from the perspective of the poor and vulnerable. Blanket approval of privatisation is not an appropriate policy decision especially in the energy sector where the government has to consider fundamental existing policy defects, including but not limited to the policy of tariff equalisation requiring over half a trillion rupee subsidies at the taxpayers’ expense when the costs and receivables are so markedly distinct between various distribution companies.
There are many mistakes that Pakistani administrations have made with reference to the economy and the current dispensation has accepted it, a fact reflected not least by the selection of the finance minister, but the Fund staff continue to ignore their design flaws, which are based on general economic principles rather than tailored to Pakistan’s unique paradigm.
While the argument that it is the Pakistani team that must provide the unique paradigm and come up with the in-house out-of-the-box solutions is valid yet the Resident Mission can and must take a more holistic view of the situation rather than simply toeing the headquarter line.
Copyright Business Recorder, 2024
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