The 6 billion dollar 39-month front-loaded International Monetary Fund (IMF) programme has achieved stabilisation defined narrowly as reducing the current account deficit and strengthening of foreign exchange reserves though it has failed to achieve other associated components of stabilisation notably a healthy growth rate (projected at an extremely unhealthy 2.4 percent in the current year) and minimal price changes (the rate for January 2020 as high as 14.6 percent with food inflation well above 20 percent).
And within the context of achieving stabilisation as defined narrowly by the economic team leaders - Dr Hafeez Sheikh and Dr Reza Baqir - there are three extremely disturbing elements that have surfaced since 12 May 2019 when IMF "prior" conditionalities to the loan approved in July 2019 came into effect. Firstly, market-based exchange rate was implemented with SBP's decision not to provide an indicative level to banks' treasuries within which the dollar-rupee parity would be free to fluctuate; however, what was ignored at the time and continues to be ignored to this day is data uploaded on State Bank of Pakistan's (SBP's) website which notes that the rupee had been undervalued since December 2018 and that in March 2019 it was undervalued to the tune of just under 3 percent. The resulting depreciation accounts for a massive rise in debt servicing as each rupee loss in terms of the dollar adds 100 billion rupees to the government debt (which given that the IMF's structural benchmark is 0.6 percent primary deficit conveniently excludes interest payments), a massive decline in imports thereby contracting customs collections as well as reducing imports of raw materials and semi-finished products though exports rose marginally in dollar terms.
Secondly, the 13.25 percent discount rate continues to stifle economic activity (since July 2019) though the Governor SBP recently announced a further 200 billion rupee credit injection into exporters at 5 to 6 percent as long-term finance facility and export refinance scheme - a decision that would reduce SBP profits thereby putting pressure on the fiscal deficit given that during the first quarter, an unprecedented rise in SBP profits went half way in lowering the budget deficit. Additionally, the high discount rate has attracted foreign portfolio investment in government securities which are even worse than the then finance minister Ishaq Dar's policy to incur debt equity (sukuk/eurobonds) as the return is more than 6 percent higher while the amortization period is a lot less than the five- and 10-year maturity set by Dar.
And finally, the IMF agreed to raising total budgeted current expenditure by 33 percent under current expenditure with Ehsaas programme parked under current expenditure (more specifically under grants to others) envisaging a 190 billion rupees allocation. It is relevant to note that this is 70 billion rupees more than what was realised last year for Benazir Income Support Programme which has been subsumed in Ehsaas programme). If this additional amount is taken away from the current expenditure, the actual rise is 31 percent. Development expenditure was budgeted to rise by 40 percent. And the first quarter review's projection of a budget deficit as per IMF was 7.6 percent. In effect, this deficit needs to be contained on an emergent basis as this is also exacerbating to inflationary pressures.
The IMF's insistence on upfront conditions was based on our history of not implementing structural reforms, including governance reforms particularly in the poorly performing power/gas and tax sectors, which are, without doubt, imperative. However, a look at the achievements of the incumbent government reveals that these reforms remain pending and that the poorly performing sectors are engaged in meeting IMF conditionalities through following the examples set by their predecessors notably passing on the buck to hapless consumers - households seriously compromising their capacity to withstand the price hike as well as the industrial sector which accounts for contracting output with a consequent impact on unemployment levels.
The conclusion is something has to give or else the present government would either have to abandon the IMF programme in the face of mounting public resistance/opposition or else fall as the carefully crafted majority in parliament may unravel due to this pressure. In other words, it is critical for the visiting Fund staff and the Pakistani team leaders to revisit/tweak some of the policies currently in place or else the major objective of the Fund programme would be lost yet again.
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