Federal Finance Minister Muhammad Aurangzeb, in a televised address to the nation this Tuesday past claimed that the International Monetary Fund (IMF) Board’s approval, a prerequisite for disbursement of the 7 billion dollars Extended Fund Facility (EFF) programme on which the staff level agreement (SLA) was reached on 12 July 2024, will be on time though this time around he wisely refrained from specifying the date, as his previous projections did not pan out.
While talking to the media the same day, Aurangzeb stated that the IMF has no objections to implementation of targeted and, perhaps deliberately left unsaid, unfunded (unbudgeted), subsidies through the multilateral donor supported Benazir Income Support Programme (BISP).
The August Economic Update and Outlook, a Finance Division publication, uploaded on 30 August 2024, maintains that “Pakistan’s economy started fiscal year 2025 with firm positive developments, setting a positive tone for the months ahead.”
So what compelled Aurangzeb, a technocrat a term that implies, without a constituency, to address the country after his Ministry released a favourable economic outlook for August? The IMF board calendar till 13 September 2024 was uploaded on the website on Tuesday and the EFF was still not on the agenda item – a deferral that fuelled speculation that the government had: (i) yet to implement all “prior” conditions agreed in the 12 July SLA and/or (ii) had announced/implemented policies that contravened the SLA, evocative of delays in reaching the SLA on the ninth Extended Fund Facility (EFF) quarterly review scheduled November 2022 but never reached due to the then finance minister Ishaq Dar violating the agreement that eventually led to the suspension of the programme. The delay in placing Pakistan’s EFF on the Board agenda so far could well be for both these reasons.
Aurangzeb maintained in his televised speech that securing external financing from friendly countries, a prior condition reached in the SLA, is at an advanced stage. Securing 2 billion-dollar external financing requires engagement with the three friendly countries with China’s reluctance attributed to the government’s inability to clear dues of the Chinese Independent Power Producers (IPPs) set up under China Pakistan Economic Corridor (CPEC) clamouring for the backlog in their payments – legitimate dues as per signed contracts; while Saudi Arabia and UAE have dangled the prospect of direct foreign investment inside Pakistan, a much more attractive inflow than borrowing, however one may well assume that the lack of a favourable investment environment in Pakistan may have prompted a request for extremely favourable monetary and fiscal policies, that would be opposed by the Fund on the grounds that it will not provide a level playing field to local investors.
Be that as it may, it is significant that the budgeted amount of commercial and Eurobonds from external sources is 676 billion rupees (2.43 billion dollars) while the Governor State Bank of Pakistan publicly announced in an interview to a foreign news agency that the country is seeking 4 billion dollars from foreign commercial banks which indicates that there has been a shortfall from another budgeted cheaper source - multilateral and/or bilateral.
The Minister claimed that securing the loans from commercial banks was also at an advanced stage, but there was no mention of the rate on offer – a rate that had been the deterrent to procuring loans from this source during the caretaker setup. True that the country’s rating by Fitch and Moody’s has improved recently, however the country’s category remains high risk.
The same day, Aurangzeb told journalists that the Fund has no issues with the implementation of targeted subsidies through BISP.
The issue relating to untargeted subsidies is a delicate one given that on 16 August 2024 PML-N supremo Nawaz Sharif, with his daughter, Chief Minister of Punjab by his side, announced a 45 billion rupees 2-month subsidy for electricity consumers in Punjab using up to 500 units per month. This generated sycophantic support and defence by PML-N federal and Punjab ministers though the alliance partner that props up the PML-N government in the centre, PPP, opposed it and what raised temperatures between the two parties - ridiculed it.
The day after on Wednesday the Punjab Information Minister in an uncharacteristically soft tone stated that there are no reports of IMF objections to the subsidy and added that “this is a sensitive matter and news benefitting the common man should be handled with care.”
It is noteworthy that some consumers have received their August bills with the subsidy however if the IMF has included the withdrawal of this subsidy as a prior condition for Board approval then one would hope that the federal and provincial government make an immediate u-turn and abandon the implementation of an economically flawed policy as with IMF approval pledged bilateral and multilateral assistance will be withdrawn pushing the country towards default. To date, no clarification has been issued by the Minister of Finance or any member of the Ministry yet, which is worrisome.
Tax collection was 98 billion rupees less than budgeted July-August this year – a source of concern that, based on the two post 2019 IMF programmes, may generate a contingency plan, envisaging higher taxes from already identified and agreed sources. In this context, it is relevant to note that this may have prompted the FBR suggestion to raise withholding tax rates across the board by a percentage point Wednesday past.
One element that as per the Outlook set a positive tone for the future needs elaboration. Inflation data released by the Pakistan Bureau of Statistics for August shows a decline to 9.6 percent in August compared to 11.1 percent in July. Even more significant was the decline of 17.48 percent average July-August CPI 2024 compared to the same period last year – 10.36 percent from 27.84 percent. Rural inflation declined by a whopping 23.66 percent during the period under review – from 31.09 percent to 7.43 percent, while urban CPI was slashed by 18.65 percent – from 25.61 to 12.44 percent.
Two observations are in order: (i) independent economists tend to look at the data and analysis provided by the Outlook with a pinch of salt arguing that the Finance Division is analysing its own performance, a task that is farmed out to independent entities in multilaterals and within donor governments.
This has accounted for an obvious and consistent tendency spanning the tenure of nearly all finance ministers to show a performance that is better than ground realities suggest.
In the case of inflation, the consensus is that it is understated by 3 to 4 percent; and (ii) last fiscal year poverty in Pakistan was at a high of 41 percent as per the World Bank, comparable to Sub-Sahara Africa.
Incomes other than those funded at the taxpayers’ expense (comprising only 7 percent of the country’s entire work force) have been declining in real terms, with persistent negative growth in large scale manufacturing sector since pre-Covid years with the upturn July-June 2024 calculated at positive 0.92 percent that may reflect not only the low base of the year before (negative 10.3 percent) but also higher sales with a commensurate decline in inventories rather than any increase in output, closure of more private sector units, and raising taxes by 40 percent against revised estimates of last year, (to finance the rise in current expenditure of 21 percent) though in total terms tax revenue was budgeted to be upped by 3718 billion rupees to fund a rise in current expenditure of 2971 billion rupees.
In addition, 70 to 75 percent of all tax revenue is collected in the sales tax mode, an indirect tax whose incidence on the poor is greater than on the rich, so rising poverty levels indicate why there is no feel good factor with respect to a decline in inflation.
The Prime Minister claimed lower inflation in August 2024 as an achievement during the cabinet meeting held on Black Tuesday in comparison to August 2023 – though ironically his administration completed its tenure on 14 August 2023 after sixteen-months in power – which implies that his then finance minister and current deputy prime minister/Foreign Minister Ishaq Dar and the rest of the cabinet must be directly held responsible for the high inflation in August 2023.
Under the circumstances one can only hope that the statistical gathering machinery as well as government officials prioritise presenting the ground realities to the public that will empower the administration to take appropriate mitigating measures on time and thereby provide a valuable service to the public that pay their salaries and benefits.
And more importantly, at the current ongoing economic impasse, one would hope that in the event that the government cannot secure the amount of loans agreed as a prior condition of the IMF a massive reduction in current expenditure be immediately implemented to forestall he possibility of default.
Copyright Business Recorder, 2024
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