EDITORIAL: Federal Finance Minister Ishaq Dar recently engaged with the US Ambassador and the UK High Commissioner with the narrative that the entire onus for the stalled ninth review rests with the International Monetary Fund (IMF) as all harsh preconditions dictated during the 1 to 9 February negotiations, read a significant raise in utility rates and the approval of a mini-budget designed to generate 170 billion rupees additional revenue, were met in February.
In addition, reports indicate that the Finance Minister is convinced that the real exchange rate is 244 rupees to the dollar and that the interbank rate of 286 rupees to the dollar, fluctuating by less than a rupee for the last fortnight or so, is a direct outcome of IMF’s refusal to look at ground realities.
And finally, that the shortfall in external inflows, estimated at around 2 billion dollars by the Fund is patently inflated as the current account deficit has been contained; besides in any case this shortfall must post-date rather than pre-date a staff level agreement on the ninth review, as was the usual practice of the Fund five years ago, given that being on an IMF programme provides a comfort level to foreign equity markets as well as amongst bilaterals and multilaterals.
The market reacted positively on Wednesday though it is unclear whether this diplomatic effort was the reason behind improved sentiments.
There is little doubt that the US has considerable influence on the Fund board; however, it is equally evident that ambassadors in general, and the US ambassador in particular, have recourse to qualified in-house economists tasked to evaluate the host country’s state of the economy as well as assess whether the policies/strategies in place are in conformity with the overall macroeconomic framework that, in Pakistan’s case, is uploaded on the IMF website as the country is still technically on the Fund programme. In this context, embassies may engage with domestic economists who may by far be better placed to evaluate policies in place.
Business Recorder backed by independent economists has noted time and again that the economic policies since Ishaq Dar took over the portfolio on 27 September 2022 are at variance with the IMF’s macroeconomic framework agreed by Dar’s predecessor and a fellow party member Miftah Ismail.
The budget is expansionary in essence, with a massive rise in current non-development expenditure – a rise of 26.5 percent from the revised estimates of last year and 53 percent from what was budgeted in the outgoing year; and therefore is not growth oriented with respect to both expenditure allocations and revenue as it relies on raising existing taxes that would further shrivel domestic consumption.
Disturbingly, the government is relying on its Plan B, unveiled on Tuesday, which envisages outsourcing the growth momentum to foreign investors while projecting 112 billion dollars foreign investment inflows in key sectors rather than on a pro-growth strategy in the budget.
The rupee-dollar parity used in the budget is 190 rupees to the dollar while Dr Hafeez Pasha, a former finance minister as well as a well respected academician, recently stated that it should be 322 rupees to the dollar by 30 June 2023.
He further contends that the existing interbank and open market rates are severely suppressed (dollars are simply not available at the quoted open market rates today) and the finance minister’s contention that the actual rate is 244 rupees to the dollar simply not supported by any indicator cited by the government.
The real effective exchange rate (REER) as determined by the State Bank of Pakistan (SBP) is 87.14 for May 2023, a value that does not translate 244 rupee to the dollar argument though it indicates that the rupee is an under-valued currency. However, critics allege that SBP is being influenced by the finance ministry covertly after the apex bank was granted autonomy by parliament in January 2022 as per the IMF dictates.
Though the finance minister’s contention that the Fund is not being fair to Pakistan by putting the cart before the horse - seeking confirmed external financing prior to the ninth review agreement - is correct but this approach of the Fund is no longer in operation and is dated to 2017. His contention that Pakistan does not require confirmed pledges for the additional 2 billion dollars is not backed by the budget, which envisages 23.7 billion dollar inflows (at the rate of 290 rupees to the dollar) with 10 billion dollars sourced to the IMF, commercial banks and issuance of Eurobonds/Sukuk whose lending rates will be determined by the rating agencies that are unlikely to give an upgrade without an active Fund programme.
Therefore, the display of bravado by the finance minister has not been in the country’s economic interest and while the delay in the budget approval by parliament as well as the insistence by senior Cabinet members that engagement with the Fund on the ninth review is continuing kindles hope, yet, there is no indication that the Finance Minister is revisiting any of the three irritants to pave the way for successful completion of the ninth review. Time is running out as the Fund has informed the government that the deadline for the end of the programme remains 30 June 2023.
Copyright Business Recorder, 2023