IMF Programme well on track

A staff mission of the International Monetary Fund (IMF) concluded its visit to Pakistan last week; it was all praise for authorities for over-performing on first quarter targets under the $6 billion Extended Fund Facility to pave the disbursement of $450 million early next month.

This is an encouraging development for Pakistan's economy, considering the red flag raised by the IMF on the dismal performance by many of the leading global economies.

Moody's Investors Service last Thursday lowered its 2019-20 growth forecast for India to 5.8% from 6.2% earlier, saying the economy was experiencing a pronounced slowdown partly due to long-lasting factors. The rating agency's projection is the most pessimistic so far and comes ahead of the International Monetary Fund's growth projections due next week.

IMF's new managing director Kristalina Georgieva last Wednesday said the global economy is witnessing a "synchronized slowdown" and its effect is "more pronounced" on emerging markets like India, indicating that the multilateral agency may revise downward its growth forecast for India in its biannual World Economic Outlook to be issued this week.

"In the US and Germany, unemployment is at historic lows. In some of the largest emerging market economies, such as India and Brazil, the slowdown is even more pronounced this year," she added.

Moody's said a prolonged phase of softer growth in India would dampen prospects for the government's fiscal consolidation plans and hamper its ability to prevent a rise in the debt burden, thus constraining the country's sovereign credit profile.

The IMF mission to Pakistan concluded: "Despite a difficult environment, program implementation has been good, and all performance criteria for end-September were met with comfortable margins. Work continues towards completing the remaining structural benchmarks for end-September."

The critical and most challenging issues that remain to be addressed are the outstanding reforms in the power sector and loss-making Public Sector Enterprises (PSEs). Both have been on the agenda of the IMF since the last one decade where both PPP and PMLN governments failed to deliver.

The IMF highlighted that "advancing the strategy for electricity sector reforms, agreed with international partners, is important to put the sector on a sound footing, and remove recurrent arrears and accumulation of debt".

The outstanding task include: a monitoring and incentive framework for strengthening the power sector's performance, including bill collection and distribution losses; improving distribution companies' governance; reducing or eliminating implicit government subsidies to particular economic sectors; assessing investment needs in the sector and designing an investment plan; and addressing the stock of circular debt to service the interest on accumulated power sector debt.

The incumbent government could have financially and politically gained much if it had from day 01 embarked on power sector reforms leading to sell-off of power generation and distribution companies in the public sector.

Also, it could have likewise gained immensely from restructuring and privatizing loss-makings PSEs.

Both the said privatization steps could have filled up government's coffers and the money so gained could have been utilized on the social sector programmes - which the incumbent government finds difficult to fund.

The other key issue is rising inflation which is now getting politically worrisome for the government. The IMF's take on the subject is: "The external and fiscal deficits are narrowing, inflation is expected to decline, and growth, although slow, remains positive." IMF expects inflation to be around 11.8 percent in FY 2020.

Exchange rate now appears steady and Rupee is likely to strengthen. The IMF said that "signs that economic stability is gradually taking hold are steadily emerging. The external position is strengthening, underpinned by an orderly transition to a flexible, market-determined exchange rate by the State Bank of Pakistan (SBP) and a higher-than-expected increase in SBP's net international reserves."

Important now is that the reforms set in motion must continue overriding political considerations - unlike previous IMF programs where difficult parts were left out due pressures from the market and opposition parties.

The Fund cautioned that "fiscal prudence needs to be maintained to reduce fiscal vulnerabilities, including by carefully executing the FY20 budget, implementing the new Public Finance Management legislation, and continuing to broaden the tax base by removing preferential tax treatments and exemptions".

What is still missing out is business transactions and flow of money in the market - both being highly important for economic growth. The winning combination consists of reforms and business transactions. One without the other is worrisome and needs to be addressed without any further loss of time.

(The writer is former President of Overseas Investors Chambers of Commerce and Industry)