In the economic arena the calendar year 2021 remained dominated by the International Monetary Fund’s (IMF’s) ongoing 6 billion dollars Extended Fund Facility (EFF) programme’s politically challenging conditions, more particularly to “prior” conditions, especially at year end.
Pakistan and the Fund have undertaken the mandatory quarterly review of the EFF three times – in December 2019, the first review, more or less as per schedule; the second to fifth review lumped together in 2021 due to the pandemic and, the sixth review scheduled for end-March 2021, though agreement was not reached till November as the newly appointed Finance Minister Shaukat Tarin tried and failed to convince the Fund staff to allow the country to phase out the harsh monetary and fiscal policy conditions.
The new schedule of the remaining reviews would be released as and when the IMF board approves the sixth review and the document is uploaded on its website. However, in the April 2021 document the Fund did not change the programme completion date perhaps to take account of the fact that elections in Pakistan have been the precursor of abandoning politically challenging reforms. Be that as it may, four reviews in less than eight months’ (January-September 2022) even if they are clubbed together appear to be over optimistic given an entire range of challenging conditions agreed in 2019 that remain unmet as the government grapples with their political and economic fallout.
Prior conditions have taken on considerable relevance in the ongoing EFF: (i) the second to fifth review staff level agreement with the Pakistani economic team led by Dr Hafeez Sheikh and Dr Reza Baqir was reached on 16 February 2021, and on 10 March the cabinet approved the Income Tax Second Amendment Act 2021 that envisaged withdrawal of exemptions estimated at 140 billion rupees (and made part of the finance bill 2022 with effectivity from 1 July 2021, that had to have been approved by Shaukat Tarin), State Bank of Pakistan amendment act and the state-owned enterprises act.
The four combined Fund reviews were submitted for IMF Board approval on 24 March leading to the disbursement of the tranche while the detailed agreement was uploaded on the Fund’s website on 24 April; and (ii) the sixth staff level review agreed on 21 November 2021, the cabinet approved the bill on SBP autonomy on 29 December and on 31 December approved the withdrawal of sales tax exemptions on 150 items to the tune of 343 billion rupees as well as tabled it in parliament the same day.
As and when the bills are passed by parliament the IMF will submit the detailed agreement to its Board for approval and tranche disbursement followed by uploading details of other time bound conditions/structural reforms agreed by Pakistan on its website. If the objective of the Fund team in insisting on a money bill as opposed to an ordinance was to cobble a political consensus then it miserably failed, as is evident from parliamentary proceedings, and one would hope it is a lesson that the Fund staff will have learned.
It is relevant to also note that monetary policy conditions (discount rate/open market operations/external rupee value etc.) have not been highlighted as prior conditions which may be attributed to the fact that SBP has, over the previous twenty-one IMF programmes, implemented conditions as agreed though they will be noted in the detailed sixth review agreement that would be uploaded on the Fund’s website as and when its Board approves the next tranche release.
Be that as it may, the Fund’s 21 November press release did note that “monetary policy needs to remain focused on curbing inflation, preserving exchange rate flexibility and strengthening international reserves” though domestic economists lament the fact that the Bank has disclaimed responsibility for inflation by insisting its due to supply side factors and administered prices, the exchange rate flexibility is sadly continuing to the detriment of the public, and reserves have been strengthened by borrowing.
The ongoing 6 billion dollar programme is markedly distinct from the previous twenty-one programmes on three counts. First and fore-most, no flexibility on the part of the IMF has been evident since the staff level agreement was reached on 12 May 2019.
This is mainly sourced to: (i) the persistent failure of previous Pakistani governments in all previous Fund programmes to implement structural reforms (particularly in the power and tax sectors and state-owned entities that would mitigate the need for going on yet another Fund programme). And instead focusing on easily reversible measures including adjusting the discount rate, over or under-valuing the rupee, raising taxes (mainly sales tax, regarded as low hanging fruit by the Federal Board of Revenue, which is a regressive tax whose incidence on the poor is relatively greater than on the rich) and passing on the cost of sector inefficiencies to the end users through administered pricing (the reason for failure to achieve full cost recovery – a standard donor legitimate demand).
Critics of the economic team leaders who negotiated the EFF in 2019 – Dr Hafeez Sheikh appointed 24 April 2019 and fired in April 2021, and Dr Reza Baqir, Governor, State Bank of Pakistan appointed on 6 May 2019 - maintain that the two men exhibited a singular lack of empathy with the people of the country; and (ii) geopolitical considerations have changed dramatically since the last IMF programme was agreed in 2013 and without US active support to tone down/phase out some of the harsh conditions as was clearly evident during negotiations in 2008 (when Shaukat Tarin was the finance minister) the current package was offered as take it or leave it.
This, they further contend, is the reason why Tarin miscalculated so badly when he pledged he would renegotiate what was agreed in the second to the fifth review when he was appointed finance minister in April 2021.
Second, the IMF programme stipulates a roll-over by friendly countries – China, Saudi Arabia and the United Arab Emirates – for the programme duration, a condition that was initially baffling as all previous Fund programmes unleashed general donor support (multilateral and bilateral) as well as generated market confidence allowing the country to engage in the equity market at lower rates of return including sukuk/Eurobonds and borrowing from foreign commercial banks.
Today there must be governmental concerns at Chinese reservations on Pakistan’s failure to meet its contractual obligations under the China Pakistan Economic Corridor as well as the extremely harsh contractual conditions agreed with Saudi Arabia in return for parking 3 billion dollars in the SBP and 1.2 billion dollars allowed under the deferred oil facility.
This situation has almost certainly compromised the capacity of the government to meet the overarching objective of the recently approved National Security Policy that emphasized the need for economic security through diplomacy.
And finally, the focus has shifted to the primary deficit (excluding debt repayments) instead of the budget deficit with the Sheikh/Baqir team noting the need for 38.6 billion dollar external loans for the programme duration (1 July 2019-September 2022) in the letter of intent they signed off on dated 2019. Domestic borrowing has risen from 16.5 trillion rupees in August 2018 to over 27 trillion rupees today while foreign debt has risen from 95 billion dollars in August 2018 to over 126 billion dollars today.
Notwithstanding these factors today, Pakistan desperately needs to provide a comfort level to its creditors that being on an IMF programme provides. In other words, the sixth review staff level agreement, however bitter the pill, will have to be swallowed.
But it is critical for the government to gain some leverage for the seventh review requiring some drastic measures that so far do not appear to be on its agenda: massive sacrifice by all recipients of current expenditure (including implementation of the necessary reforms to reduce the outlay for example on pensions) instead of reducing public sector development programme by 200 billion rupees announced by Tarin as that has an anti-growth bias; structural reforms begin to be implemented by the power and tax sectors; and last but not least bold decisions to restructure or sell loss-making public sector entities.
Copyright Business Recorder, 2022