No surprises

The technical agreement reached between the IMF and Pakistan does not carry any surprises except, of course, the matter about market determining the exchange rate. But over the last several months this issue has been discussed and debated so threadbare that it would have been a surprise if the Fund's technical team had withdrawn this conditionality.
The agreement will come into force after it is approved by the IMF Executive Board, sometime in mid-June after the announcement of our budget for the next fiscal year. Being front loaded, the first instalment of the agreed loan amount is expected to be released after we had fulfilled all conditionalities related to the first tranche.
There is, of course, an emphatic declaration in the agreement that the withdrawal of subsidies from electricity and gas bills would not affect 75 percent (electricity) and 40 percent (gas) of the population respectively - considered to be poor - still, the impact of steep increases in the tariffs of electricity and gas otherwise would surely cause most other essentials like a two square meals a day, clothing, housing, education, health and transport to go out of the reach of majority of the population forcing a significant number of Pakistani middle classes to fall below the poverty line.
With the cost of production going up because of steep rise in most of the inputs including capital as the interest rates are expected to increase to around 11 percent driven by a double digit inflation rate, our exports are likely to remain largely uncompetitive, not making much of difference to the trade deficit despite the expected decline in imports because of market determined exchange rate as well as due to higher tariffs on non-essential imports causing, on the other hand, in the process, a significant decline in revenue collection at the customs stage.
Because of relative higher cost of production, the private sector investors are likely to adopt a wait-and-see approach rather than risk their capital in a market sans enough consumers as unemployment is expected go up because of a slowdown in economic activity. This is going to lead to stagflation and at the same time cause, among other things, a significant decline in revenue collection.
Meanwhile, with debt obligations, defence needs and expenditure on safety nets going up, the yawning gap between income and expenditure is most likely to end up expanding the budgetary deficit beyond the number of primary deficit fixed by the IMF for the next fiscal year.
So, on the face of it the very first year of the three-year $6 billion Extended Fund Facility (EFF) programme of the IMF the fiscal as well as current account deficits are most likely to widen further, going perhaps even beyond the targets fixed by the Fund. This would lead to either the Fund ending the programme on its own because the recipient had failed to fulfil its first tranche related conditionalities or Pakistan withdrawing from it unilaterally as the ruling elite finding that the next phase of structural reforms would cause it to share hardship with the not-so-privileged a majority of the population, would force the government to throw in the towel. But like in the past the Fund, if the US so wished, would offer as many waivers as it would take for Pakistan to complete the programme.
According to a statement issued by the IMF, the EFF aims to support Pakistani authorities' "strategy for stronger and more inclusive growth by reducing domestic and external imbalances, removing impediments to growth, increasing transparency, and strengthening social spending".
The authorities recognise the need to address these challenges, as well as to tackle the large informality in the economy, the low spending in human capital, and poverty.
The IMF mission chief said: "The budget (2019-20) will aim for a primary deficit of 0.6 percent of GDP supported by tax policy revenue mobilisation measures to eliminate exemptions, curtail special treatments, and improve tax administration.
"Priority areas include improving the management of public enterprises, strengthening institutions and governance, continuing anti-money laundering and combating the financing of terrorism efforts, creating a more favourable business environment, and facilitating trade."
While in the brief appraisal made above the picture of the economy that emerges post the latest EFF signed between Pakistan and the Fund appears rather gloomy, it would not be out of place here to compare it with the picture that has emerged in Egypt which had signed an EFF with the Fund in 2016 for an amount of $ 12 billion. The case of Egypt is being reviewed here for comparison because the Fund's country head in Egypt, Reza Baqir, a Pakistani, has taken over as Governor, State Bank of Pakistan, the other day after having resigned from his Egyptian assignment.
The Egyptian EFF had pledged to unleash the economic growth in the country aiming as well to bring down public debt, stabilise the foreign exchange market, lower the fiscal deficit, and contain the inflation.
But today almost three years hence, Egypt with its GDP at US$ 300 billion is showing signs of strain. Poverty is on the rise and much anticipated economic stability continues to be elusive.
A net importer of food, the country needed to grow at a rate of more than 7 percent to accommodate its ever building youth bulge. According to IMF's own estimates, almost 34 percent of Egypt's population is under the age of 15 and each year around 700,000 people enter the labour market in search of jobs which are being suppressed under IMF's structural adjustment programmes.
Besides poverty and unemployment, other macroeconomic fundamentals are also very depressing, inflation is touching new highs with the passing of each day as subsidized food and fuels are being phased out by the government. Once upon a time, the fastest growing economy of the Middle East, Egypt is now struggling with stagnant exports and non-existent entrepreneurship. According to World Bank's estimate, nearly 60 percent of Egyptians are either poor or belong to the poorest groups. The World Bank further pointed out that economic decisions, such as lifting of subsidies and others, have affected the middle class, which is unable to cope with increased cost of living.
According to Egyptian Ministry of Local Development, the most alarming trend currently is the rise in poverty in upper Egyptian centers where the increase is more than 50 percent, i.e., almost double the national average elsewhere. Though Egypt has been one of the oldest clients of the IMF and has been coordinating with the Fund on economic policy management since 70s, the most recent EFF inked in November 2016 appears to have only further deepened its economic woes. The fourth executive review completed in April 2019 indicates that Egyptian economy is not showing any signs of turnaround.
It is worrisome that right under the direct supervision of IMF, standards of living in Egypt are deteriorating as cost of living is increasing. Middle class is shrinking and more and more people are being added to the poverty pool. According to a recent report issued by Central Agency for Public Mobilization and Statistics, the percentage of people living below the poverty line has risen from 28 percent to 30 percent within three years, i.e., 2015-18. Due to law and order situation, the tourism sector is not picking up and due to lower growth in the broader Middle East and other parts of the world, workers' remittances have been on a decline.
The cumulative effect of IMF reforms has contributed to steep inflation (officially its 24.3 percent) and phasing out of food and fuel subsidies in the next budget is expected to render it impossible for the majority of population to make two ends meet. Accordingly, fuel subsidies will be reduced by 40 percent while electricity subsidy will be reduced by 75 percent in FY 2019-20. Thus cumulatively subsidies amounting to more than $ 5 billion will be slashed in the coming days.
The IMF prescription has devalued the Egyptian currency and led to increased cost of manufacturing which ultimately has resulted in noncompetitive export sector. IMF programme was aimed to unleash private sector economic growth and job creation, but by the end of April 2019, when IMF has completed its 4th review, none of these objectives were achieved.