The IMF tranche

Successful negotiations on the ninth review under the IMF's Extended Fund Facility (EFF) in Dubai constituted a welcome news for the country despite missing three important targets and imposition of new taxes worth Rs 40 billion prior to submission of staff recommendations to the Board. Addressing a joint press conference on 5th November, 2015, IMF Mission Chief Harald Finger stated that "after productive discussions, the Mission and Pakistani authorities have reached staff-level agreement on the completion of the ninth review subject to approval by the IMF management and the Executive Board. Upon completion of this review, SDR 360 million (about dollar 502 million) will be made available to Pakistan." However, Pakistan needed to work harder on four weak areas - taxation, energy sector reforms, restructuring and privatisation of PSEs and improvement in investment climate. Finance Minister Ishaq Dar added that the World Bank and ADB were also expected to approve dollar 500 million under international development assistance and dollar 400 million under the DPC, respectively, in November 2015.
Talking about the prospects of the economy, Ishaq Dar claimed that IMF had estimated a growth rate of 4.5 percent but the government will make efforts to achieve a 5.5 percent GDP growth rate. Inflation, which was initially estimated at 4.7 percent is projected by the Fund Mission at 3.7 percent. As of last month, Pakistan had foreign exchange reserves of dollar 20.073 billion out of which dollar 15.25 billion were held by the State Bank. A statement handed over to the media observed that "economic activity continues to improve while challenges remain." A slowdown in private sector credit growth and weaknesses in exports and imports are weighing heavily on growth prospects. Headline consumer price inflation is expected to increase to around 4.5 percent by the end of the year due to a likely bottoming out of the effects of low commodity prices. Mission welcomed the authorities' continued commitment to their IMF-supported economic reform programme, which has significantly reduced near-term risks. Performance criteria on net domestic assets (NDA) and fiscal deficit were missed, as was the indicative target on tax revenues. Authorities were making progress to tackle structural obstacles to growth. Reform efforts should continue to focus on strengthening public finances and external reserve buffers and on accelerating steps to widen the tax net to create space for more infrastructure investment and social assistance.
Although government will be pleased with the positive nod of the IMF Mission to release the next tranche of dollar 502 million, the statement of the Mission Chief and the observations contained in the press release after the end of the negotiations are definitely a cause of concern, calling for immediate policy review. To highlight their achievements, the Finance Minister and the Prime Minister repeatedly refer to the rise in foreign exchange reserves, lower inflation and an expected modest increase in GDP growth rate as indicators of their successful economic policies but the improvement in these indicators seems to be transitory and not the result of their hard efforts. For instance, the rise in foreign exchange reserves is mainly due to foreign loans from bilateral and multilateral sources and the situation could quickly change when the repayments are due. Similarly, the slowdown in inflation is due to the higher base effect and the decline in the prices of various commodities, particularly oil and its products in the international market. Besides, a sustained growth over a longer period is only possible when saving and investment rate of the economy improves to a reasonable level, say around 18 percent, which is not in sight even in the medium-term. Of particular concern are the weak areas on which the IMF wants the Pakistan authorities to focus to change the economic fortunes of the country. The IMF statement calls for the strengthening of public finances and external buffers and widening of tax net. These are the same areas which have been underperforming in Pakistan over decades and cannot be fixed easily. The government continues to make feeble efforts for improvement but is always deterred by vested interests. The lack of substantial progress on restructuring and privatising loss-making PSEs due to stiff resistance of the trade unions and non-co-operation by the opposition parties continues to bleed the national exchequer. The security situation on the borders and within Pakistan is another problem which continues to attract the utmost attention of the authorities at the cost of economic imperatives of the country.
The statement issued after the negotiations also gives the impression that talks between the IMF Mission and Pakistani authorities would probably not have been successful if the attitude of the member countries of the Fund with overwhelming quotas would not have been very sympathetic. Our failure on two performance criteria and one indicative target would perhaps not have been overlooked and the programme derailed due to the failure of the government to comply with the necessary conditionalities. There appears to be a fundamental design defect in the Fund's programme. The target in relation to borrowing from State Bank needs to be revised as it is forcing the Government of Pakistan to borrow from commercial banks and crowding out private sector credit.
Anyhow, the joint statement is replete with the weaknesses of the economy which need to be addressed at the earliest to stabilise economy and probably negotiate another programme with the Fund. For instance, Secretary Privatisation has disclosed that the IMF had reportedly expressed annoyance at extending bailout packages and expenditure-based financial support to those entities which are under active privatisation plan. One fails to understand how financial support to these institutions could be stopped to address the concerns of the IMF when such a support has become a common practice and even salaries of the staff are paid from such a support. The statement also says that the policy actions of the government have reduced near-term risks to the economy. It means that the authorities have still to work very hard and go a long way to ensure sustainable progress in various areas of the economy. In our view, the government, instead of rejoicing over the successful negotiations with the Fund Staff, still needs to concentrate and redouble its efforts for long-term improvement in the health of country's economy.