ISLAMABAD: With the International Monetary Fund (IMF) reportedly insisting on politically challenging contractionary monetary and fiscal policies as prior second tranche release conditions, the Khan administration appears to be caught between a rock and a hard place.
Sources on condition of anonymity told this newspaper that negotiations with the Fund for the resumption of the stalled extended Fund facility include: (i) an increase in the policy rate by 200 to 300 basis points, a decision that may choke off all economic activity like in the previous year; and (ii) a market determined exchange rate, as pledged by the economic team leaders last year to the Fund, or in other words the rupee must be depreciated rather than strengthened as has been evident in recent weeks.
The reforms agreed with the Fund with respect to achieving full cost recovery in the energy sector which in the face of continued poor performance of the sector has invariably implied jacking up tariffs which in turn would further raise input costs and make our products uncompetitive internationally.
Accepting IMF conditions at this point in time when the opposition is out on the streets would be extremely challenging for the Khan administration. When contacted an official of finance ministry said that Pakistan has been holding meetings with the IMF but did not respond when asked when the EFF programme would be resumed.
However, he said that fiscal deficit during the first two months of the current fiscal year was contained to 0.9 percent of GDP (Rs 415 billion) and primary balance surplus was Rs 69 billion (0.2 percent of GDP). He added that revenue collection for the first quarter of the current fiscal year has been above target and the trend is expected to continue in the second quarter as well if Covid-19 remains under control.
He added that non-tax revenue collection was higher by Rs 156 billion during July-August 2021 and provided significant support to contain the fiscal deficit while FBR tax collection surpassed its target for the first quarter of 2021.
He however acknowledged that the risk of high public spending due to Covid-19 may build pressure on expenditure in second quarter 2021. Presently, inflation is one of the main challenges. However, the government is taking all possible measures to control it, he added.
Copyright Business Recorder, 2020