Return of the IMF

The news has come from Dubai that the review has been successfully completed by the IMF after a hiatus of more than four months. This is a welcome development because on top of the current political uncertainty, Pakistan cannot afford greater economic uncertainty at this time. The IMF has shown the same sympathy and understanding as in the first three reviews. The Mission in the press statement says that 'it is encouraged by the overall progress in strengthening macroeconomic stability and output growth.' This statement is made despite a visible slowdown in growth of the large- scale manufacturing sector to only 2.4% between April and August 2014 and a decline in agricultural growth to just over 2%. The press statement goes on to say that 'economic indicators are improving, with growth expected to reach 4.3% in fiscal year 2014- 15, inflation on a downward trajectory and credit to the private sector expanding at a robust pace.' It will indeed be a sign of great resilience of Pakistan's economy if it can still show a growth rate of 4.3% after the devastating floods which led to crop losses in over 2.4 million acres. A downward trend in inflation is due largely to a fall in international commodity prices. But the 'core inflation' remains sticky at 8%. Private sector credit has expanded by only Rs 7 billion up to the end of October as compared to Rs 34 billion last year. This can hardly be called a 'robust pace.' The ultimate act of sympathy is when the Mission says that 'the authorities reform program remains broadly on track with the Government and SBP meeting most quantitative performance criteria for end of June and of end of September 2014.' There are five quantitative performance criteria in the programme. A footnote to the press statement indicates that two criteria were not met in June and three not met in September. It is hoped that the Executive Board will show the same sympathy as the IMF staff in granting waivers. The reality is actually revealed by the statement that 'the authorities are committed to take necessary actions for missed targets, and with these actions, they will be on track to meet the objectives '. Also, a Memorandum of Economic and Financial Policies will be prepared by the Government, which will be considered by the Executive Board in December. Does this mean that the Government has agreed to a set of prior actions before the release of $1.1 billion in December? What are these actions? Do they include increase in gas prices, faster depreciation of PKR, accelerated privatisation, withdrawal of more SROs and so on? The next few weeks will reveal which actions are implemented. The statement that the 'reform program remains broadly on track' is again a sympathetic assessment of the progress made, especially with regard to the two key sectors of tax reforms and power sector reforms. The former reforms have failed to yield enough revenues and targets have been successively missed. The management of the power sector has deteriorated in 2013-14. While transmission and distribution losses have remained unchanged, billing losses have increased by four percentage points, equivalent to higher non- recovery of Rs51 billion. The circular debt is back to over 250 billion.
The potentially most important performance criterion is the level of international reserves (NIR). It was expected to increase by $1200 million between end- June and end- September. But it has fallen in these three months. By end December, NIR is expected to be higher by $1700 million? How will this difficult target be reached? The sale of shares of our 'golden nugget,' the OGDC, has failed to get the desired response from foreign investors. Perhaps the timing was wrong. The sell-off should have come after successful completion of the IMF review. Anyway, without these large privatisation receipts, it is unlikely that the performance criteria for NIR will be met in end- December. Overall, there is need to thank the IMF mission for its support to Pakistan. It is also hoped that the IMF Executive Board will grant the five waivers for the two quarters and help Pakistan in restoring stability in its balance of payments once again and build up its reserves.
(The writer is the Managing Director of the Institute for Policy Reforms (IPR) and a former federal minister.)