EDITORIAL: The Resident Representative of the International Monetary Fund (IMF) in Islamabad informed Business Recorder that government of Pakistan met the last prior condition under the staff-level agreement dated 13 July seventh/eighth reviews on 31 July when it raised the Petroleum Development Levy (PDL) on 31 July with effectivity from 1 August: from 10 to 20 rupees per litre on petrol, from 5 to 10 rupees per litre on high speed diesel (HSD), kerosene and light diesel oil (LDO). This accounted for the raise in the price of HSD by 8.95 rupees per litre, kerosene by 4.62 rupees per litre and LDO by 0.12 rupee per litre.
However, the price of petrol was slashed by 3.05 rupees per litre — a product used by millions of motorbike as well as car owners in the country, consumers extremely vocal in the event of a raise in price of fuel.
Thus there was concern at the time that the reduction in price of petrol notwithstanding the 10 rupees per litre rise in PDL would have to be corrected when the next notification was issued by the government. Effective 16 August the price of petrol was raised by a whopping 6.72 rupees per litre, LDO’s by 43 paisa per litre while the price of HSD decreased marginally by 51 paisa and kerosene’s by 1.67 rupees per litre.
It was after this correction that the IMF Board’s date for approval of the $ 1.17 billion tranche release was set on 29 August bringing it home yet again to the general public that there is to be no reprieve from the Fund in terms of phasing out some of the harsh conditions notwithstanding the year-on-year Sensitive Price Index of 28.2 percent in July, a Consumer Price Index of 26.9 percent and a core inflation or non-imported inflation of nearly 12 percent in July.
And it is significant that Finance Minister Miftah Ismail has already warned the public that PDL will be raised by another 10 rupees per litre effective 1 September, unless of course the international prices of fuel and the rupee-dollar parity plummet to such an extent whereby there may not be a raise in the pump price.
The IMF Resident Representative also stated that in order to meet the higher financing needs for 2023 and catalyse additional financing the IMF Board is likely to “consider an extension of the Extended Fund Facility (EFF) until end June 2023 and an augmentation of access by SDR 720 million that will bring the total access under the EFF to about 7 billion dollars.”
Three observations are in order. First, the additional financing needs refer to the 21 billion dollar required to pay off interest on past loans (and principal as and when due) as well on debt equity (Sukuk/Eurobonds), strengthen the foreign exchange reserves by around 6 to 7 billion dollars and to meet the current account deficit (trade deficit minus exports plus remittances); however, around 10 billion dollars will be required to meet the one trillion rupee additional budget expenditure for the current fiscal year which cannot be supported given the state of the economy.
Second, the additional financing refers to inflows from friendly countries, all making any disbursement contingent on staying on the EFF, and there are reports that Saudi Arabia has agreed with the Fund to allow Pakistan to use 2.8 billion dollars worth of Saudi Special Drawing Rights (SDRs) based on Saudi IMF quota. In other words, Pakistan’s indebtedness is to rise dramatically this year and any leverage that would have been possible through curtailment of budgeted expenditure and increase in revenue is not evident in the budget 2022-23.
Thirdly, the extension of the programme till end June next year will bring it uncomfortably close to the scheduled elections, unless of course they are held earlier, which if past precedence is anything to go by, would imply reneging on all pledges made to the Fund in terms of domestic expenditure, revenue and borrowing.
By the time the next tranche is released Pakistan would have used 4.2 billion dollars out of the 7 billion dollars EFF as well as raised its external borrowing from 95 billion dollars in 2019 (before the EFF) to over 140 billion dollars by end of last fiscal year and there is precious little to show for this increase.
The current government intends to borrow around 40 to 42 billion dollars more this year alone and there should be serious concern that this additional borrowing may go the same way as past borrowings unless structural reforms are implemented, particularly in the appallingly mismanaged energy sector and the sustained poor performance of Federal Board of Revenue that continues to rely on indirect taxes, whose incidence is greater on the poor relative to the rich (PDL is an indirect tax) to generate the bulk of government revenue.
Politically challenging reforms are required and in spite of claims to the contrary this government has yet to show some backbone in pushing forward as it faces resistance not only from the opposition but also from within its own ranks.
Copyright Business Recorder, 2022