The IMF package

EDITORIAL: A Pakistan Tehreek-e-Insaf Khyber Pakhtunkhwa government spokesperson on the economic affairs has declared the government’s stated position to seek another International Monetary Fund (IMF) programme as soon as the current one expires “highly critical” — a stance that is fully supported by economists — independent or affiliated with a national political party.

This is so, given the deepening economic impasse where foreign exchange reserves increased from just enough to cover less than three weeks of imports to three months but largely strengthened by external debt, net outflow of foreign exchange, and last but not least the budget deficit plugged by domestic borrowing, which, in turn, was pumped right back into the economy during the caretaker setup to fund current expenditure — a highly inflationary policy with the disturbing potential of increasing poverty levels from the current high of 40 percent.

Although the spokesperson attributed the proposal to shift Benazir Income Support Programme (BISP) to provinces, to revisit the 2010 National Finance Commission (NFC) award to the IMF team and the end of a federal public sector development programme, which would transfer the onus of funding infrastructure development on the provinces but prudence dictates that this linkage be deferred till the Fund documents on the second and final review under the ongoing Stand-By Arrangement are uploaded on its website as these specific proposals have been under discussion during the tenure of the previous two elected governments and may have been proposed by the newly-elected government to the Fund team as a means to reduce expenditure and raise revenue rather than have been a Fund suggestion.

While shifting the funding of BISP to provinces, or sharing it, would no doubt reduce government outlay by about 230 billion rupees per annum, yet it would also compromise the capacity of the provinces to fund other social and infrastructure sector development schemes and in the case of KPK, where the health card scheme has been revived, resources may become particularly tight which, in turn, will have implications on the surplus agreed with the Fund.

The NFC award has been implemented; however, the consonant clauses of the 18th Amendment of the constitution remain unimplemented to this day consisting of devolution of several ministries, including health and education, that would save the federal government about a trillion rupees.

Besides the Pakistan People’s Party Parliamentarians, a major partner of the coalition government, has already indicated that it would not be supportive of a constitutional amendment with respect to this particular clause of the 18th Amendment.

Be that as it may, since the staff-level agreement was reached on 12 May 2019 on an Extended Fund Facility programme, the IMF team has not agreed to any phased-out approach to the harsh upfront conditions – a plea that was made by finance ministers Shaukat Tarin, Miftah Ismail and Ishaq Dar.

The current programme was secured by the then prime minister Shehbaz Sharif, who pledged to ensure the implementation of all conditions within the agreed timeframe, a pledge that was adhered to by the caretakers.

It stands to reason therefore that the next programme is unlikely to allow a phased approach with respect to ensuring prompt full cost recovery measures in all utilities that would, in turn, lead to higher tariffs with a consequent impact on inflation.

It is also unlikely that the Fund would agree to lowering the discount rate irrespective of the fact that in Pakistan a high (positive) discount rate raises domestic debt as the government as the largest borrower, an inflationary policy, while the private sector’s key input (capital) costs rise to a level that makes it uncompetitive regionally as happened during the past two years and with a consequent negative impact on output and exports.

While one would suggest that Pakistan authorities build an econometric model that will convince the Fund that the discount rate in this country may actually raise inflation instead of decreasing it and that a balance be found to minimise its negative features yet at the same time one would hope that the major IMF design flaw since 2019 be rectified: the focus on primary deficit must go hand in hand with a sustainable budget deficit to minimise the inflationary pressures that reflect government profligacy and its failure to contain elite capture of the budgeted expenditure and resources.

Copyright Business Recorder, 2024