The International Monetary Fund (IMF) has not yet firmed up dates for its negotiating mission's visit schedule to Pakistan after the meeting between Prime Minister Imran Khan and the Fund's Managing Director Christine Lagarde on 10 February 2019 in Dubai, though there appears to be an understanding that the two will proceed with negotiations for a bail-out package. However reports indicate that explicit instructions have not been issued to ensure successful completion of the negotiations at whatever cost given several statements of positions taken by Prime Minister Imran Khan and the IMF management.
The IMF has thankfully changed the mission leader, as the previous one consistently failed to not only not ensure implementation of agreed structural benchmarks and time bound actions but also failed to adjust benchmarks given the ground realities that included: (i) massive data manipulation by the then Finance Minister Dar's team reported by the media, including Business Recorder, (ii) deteriorating key macroeconomic indicators particularly falling exports and rising imports, with no structural time bound benchmark specified to correct the over valued rupee, and (iii) an inordinate heavy reliance on external borrowing be it through other multilaterals/bilaterals/commercial banks/debt equity to shore up foreign exchange reserves.
There is a pervasive perception in Pakistan that the decision to increase electricity prices by 33 percent in the last week of October 2018 was taken after the meeting of finance minister Umer and Lagarde during the annual meeting of the IMF in the second week of the same month. The objective valid from an economic point of view was to recover 144 billion rupees with a 5 rupee per unit cut in price for the agriculture sector while exempting small and medium commercial consumers, schools and hospitals from the increase. However by January this year the Khan administration compromised its capacity to recover the amount by deciding to decrease electricity tariffs by 3 rupees per unit for five zero rated industries. Asad Umar claimed that as he had promised electricity was being supplied to the five zero rated industries at 7.5 cents per unit (though needless to add the rupee depreciation led to an automatic rise in tariff) reducing the sector's ability to recover the 144 billion rupees.
Gas rates were raised in September 2018 to recover 94 billion rupees from consumers - 10 percent increase for the lowest slab of consumers and 143 percent for the highest - again a decision that can be supported from an economic perspective.
The decision to raise electricity and gas prices were taken before formal negotiations on the IMF bailout package began early November 2018. Reports indicate that the Fund staff fully supported the decision to raise rates as a good first step but insisted that a further raise was necessary to ensure: (i) full cost recovery which must be the over arching objective as the government could ill afford the massive budgetary subsidies to the electricity sector with its ongoing unsustainable budget deficit; and (ii) to identify time-bound governance reforms, pre-programme conditions, and if the government fails to show results as was the case in the previous two IMF programmes, to insist on a time bound privatization programme of distribution companies.
The Pakistan Tehrik-i-Insaaf (PTI) government continues with the previous administrations' policy of extending subsides to the power sector through cross subsidies and has tried to cut down on electricity theft like the PML-N administration but the circular debt continues to rise with obvious negative implications on all subs-sectors financial health. A better option would be to use the additional funds generated through the Khan administration's stated policy to merge all social sector programmes, including the Benazir Income Support Programme where beneficiaries have been identified to the satisfaction of all donors, and desist from extending subsidies to life line electricity and gas consumers.
The Fund would not hesitate to request data of all loans procured by the government, including those under China Pakistan Economic Corridor (CPEC) as well as the 2.5 billion dollar commercial loans reportedly being negotiated with China at present, the one-year 3 billion dollar loan already disbursed by Saudi Arabia and one billion dollar UAE loan parked with the State Bank of Pakistan with another 2 billion dollars expected. Unfortunately neither of these countries is known to be comfortable with the release of terms and conditions of their loans/support to any country.
The IMF team is also likely to insist that the government focuses on reducing the budget deficit - a key macroeconomic stabilization requirement. If the government fails to come up with credible numbers which indicate higher revenue and/or lower expenditure chances are that the incumbent government may be forced to follow the path of its predecessors (if it decides to go on a Fund programme): (i) by opting not to reduce current expenditure (data indicates that the Khan administration raised allocation for defense late last year while its savings have been no more than 21.8 billion rupees as a consequence of the austerity drive launched by the Prime Minister) and instead slashing development expenditure with obvious negative repercussions on growth; and (ii) projecting a raise in revenue from measures that are unlikely to bear fruit. An example is that Asad Umar like his predecessors has requested Nadra to share data with the FBR with the objective of raising tax revenue through better use of technology however as evident in the past there are a number of lacunas in mining this data.
The IMF does not define good governance as selecting the right man or woman for the job, a tendency exhibited by the Khan administration in common with previous administrations. The Fund is likely to demand more specific policy measures to ensure good governance including: (i) restructuring and/or privatisation; and (ii) ensuring that regulatory authorities (Nepra, State Bank of Pakistan, Oil and Gas Regulatory Authority, Pakistan Telecommunication Authority, Frequency Allocation Board and Public Procurement Regulatory Authority) are allowed to operate independent of any political interference.
The IMF is also a big proponent of a realistic rupee value though the government, rightly, is likely to stipulate a specific value band out of which it would intervene in the market. And finally, the Fund is likely to support higher rates of return as an integral component of the monetary policy to mop up excess demand, and is unlikely to support the industrial promotion package envisaged under the yet to be approved second finance amendment bill 2019 as it envisages a higher outlay for the industrial sector.
To conclude, there is likely to be many a slip between the cup and the lip and it is not yet certain that the Prime Minister would accept the Fund's final conditions even though he appears to think that his talk with the IMF MD would pay considerable dividends. Had a major contributing country or bloc of countries supported the package to Pakistan, like during the Zardari-led government, IMF conditions may have been less harsh but with no such visible support the Prime Minister is being majorly over-optimistic.
This is the second of a two-part series of articles detailing the measures taken by the government that in all likelihood, if endorsed by the Fund, would be considered insufficient or simply not be endorsed.
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