The International Monetary Fund (IMF) uploaded documents early 11 October Pakistan time, nearly thirteen weeks after the Staff Level Agreement (SLA) was reached on 12 July on a 7 billion-dollar Extended Fund Facility (EFF) programme - a delay attributable to the implementation of agreed prior conditions - and fifteen days after Board approval on 25 September.
The document, as previous such documents, specifies that discussions with Pakistan authorities ended on 23 May, nearly four and a half months ago, and the report is based on information available at the time of these discussions with the staff report completed on 11 September.
The same day, on 11 October the Fund also uploaded a report on Pakistan’s Selected Issues inclusive of Pakistan Economic Performance and the road ahead, measuring gains from structural reforms and climate adaptation investment in Pakistan and the Sovereign Bank nexus in Pakistan (which highlights the systematic shortage of liquidity in the banking system and the banks’ substantial purchases of government bonds significantly altering the transmission of monetary policy from the financial system to the wider economy). The Mission Leader for the EFF was cited as one of the authors of this report though not as the lead writer.
The report, as is expected from those evaluating their own work, appreciated the design of the previous intervention (approved in July 2023 for a nine-month 3 billion dollar Stand-By Arrangement) with a focus on three achievements.
First, growth which naturally rebounded to 2.4 percent driven by the farm sector (subsequent to the 2022 floods), while industrial and services sector were subdued (1 percent) due to lingering 2023 effects - effects that, to put it more starkly, were due to the severely flawed policies implemented during the nine-month-long finance portfolio held by Ishaq Dar (27 September 2022 till 30 June 2023 when the SBA was signed).
Second, inflation decelerated supported by tight fiscal and monetary policies. This view is backed by economic theories which, no doubt, the mission leader and his team members learnt at university that were reinforced subsequently during their employment with the Fund.
However, this does not apply to Pakistan for mainly two reasons – tight fiscal policy indicates higher revenue generation but persistent failure to contain current expenditure financed with domestic and foreign borrowings has led to unsustainably high deficits which are highly inflationary; while a tight monetary policy has contracted private sector borrowing though government borrowing to fund current expenditure has been rising.
In addition, the impact of the Fund condition to take administrative measures to ensure full cost recovery account for a steady rise in tariffs and a continuous erosion of disposable income that is the cause of much public discontent today that is acknowledged in the report by highlighting the associated risk in programme implementation.
The report has a section on data issues and ranks national accounts and government finance statistics with some shortcomings that somewhat hamper surveillance. Prices (inflation), external sector statistics, monetary and financial statistics, inter-sectoral consistency and median rating is a B which is defined as data that has some shortcomings but is broadly adequate for surveillance though how broadly is of course not specified.
Third, external account has shrunk sharply supported by “a strong export and remittances rebound that has outpaced a more gradual import recovery,” a claim that has been much touted by the present government; however, the report on Selected Issues more pertinently maintains that Pakistan has been falling behind its peers in terms of export performance, while declining export performance and limited openness to trade challenge Pakistan’s development and external viability.”
Be that as it may, the report projects negative 0.9 percent as the current account balance for this year against negative 0.2 percent last year and negative 1 percent in 2023. Months of next year’s imports of goods and services as part of gross reserves are estimated at 2.1 percent this year as opposed to 1.6 percent last year.
Some economists maintain that the current account deficit containment maybe mainly due to delays in opening letters of credit – an argument that the IMF indirectly supports as it urges the government to simplify import/export documentation process.
Lack of focus in the report on this noncompliance by the government may be due to the IMF staff’s emphasis on ensuring that the Dar era disastrous policy of controlling the rupee-dollar parity is never ever under consideration. The report refers to the rupee remaining stable at 280 to the dollar and “spreads between foreign exchange rates in the interbank and parallel market remaining narrow,” which have fueled remittance inflows.
The report’s damning indictment of the handling of the economy by all previous administrations is fourfold. First, support of businesses through subsidies, favourable taxation arrangements, protection and governmental price setting has undermined the development of a dynamic and outwards oriented economy.
The report notes that Staff also urged the government to avoid using tariffs to promote industrialisation and protect sectors that are unable to compete or become self-reliant and trade policies must remain focused on reducing trade weighted average tariffs, which may have long-term beneficial implications though it would have negative implications on growth for the current year at least. This is fully supported by independent economists though the Fund also rightly argues that one of the risks is demand for support from vested interests that has increased over time with successive administrations continuing to misallocate resources.
Second, efforts towards identified reforms including under the IMF supported programmes were generally short-lived and abandoned or reversed. This is certainly true given that we are currently on the twenty-fourth programme but there have been no design updates in the ongoing programme.
There has been (i) no change in the inordinate focus on raising revenue (discussions focused on raising direct income tax collection to 357 billion rupees by bringing exporters into the tax net, streamlining personal income tax for salary and non-salary individuals, reducing slabs to five and raising the maximum NSI to 45 percent), with reliance on indirect taxes continuing in the budget whose incidence is greater on the poor than the rich (though the Fund keeps referring to widening the base).
The need for federal-provincial fiscal relations was highlighted, a long-standing demand and though federal and provincial government sources have reportedly committed to legislating a farm income tax in January next year to be implemented by 1 July 2025 however the report provides a different time-line - each province will amend agricultural income tax legislation and regime to fully align with federal personal income tax for small farmers and federal corporate tax for commercial agriculture to commence taxation by January 2025 – a discrepancy that the government needs to clarify as elite capture may well have forestalled its implementation. In addition, the pledged surplus of the provinces may not be attainable given the drive to extend subsidies by Punjab (at an unbudgeted cost of 55 billion rupees for electricity for two months) with the other provinces unable to meet the pledged surplus for political reasons; (ii) pervasive elite capture of our resources continues as in the IMF approved budget for the year; and (iii) there are no time barred quantitative conditions or structural benchmarks on reduction of current expenditure (though again the Fund does mention the need for it) but there is mention of not allowing supplementary grants.
These exhortations by the Fund without time-barred quantitative targets and structural benchmarks may best be defined as butt covering.
Third, the Fund again advises caution with respect to the establishment of Sovereign Wealth Fund and the Special Investment Facilitation Council and highlighted the “need to ensure a level playing field with regard to investment environment and avoid watering down in governance standards,” by ending the section on the note that these issues need to be addressed.
And finally, the report notes that risks remain, political uncertainty remains significant and pressures for easing policies and providing tax concessions and subsidies are strong while lower external financing “could undermine the narrow path to debt sustainability given the high level of gross financing needs and place pressure on the exchange rate and on banks to finance government.”
There is, as expected, a section on climate change, given “Pakistan’s exceptionally high vulnerability to climate change, freeing up fiscal space for adaptation investment within the confines of debt sustainability will be critical. The custom baseline scenario assumes a zero primary balance from 2030 onwards.
The standardized scenario reflects adaptation costs (i.e., a deterioration of the primary fiscal balance) of 0.6 percent of GDP annually, before gradually declining towards 0.3 percent of GDP by the mid-2030s. The illustrative customized scenario is based on reduced initial adaptation investment, which could arise due to financing constraints, among others, and relatedly lower long-term growth (3.5 percent instead 4.5 percent).”
To conclude, not only is the report based on dated information but also it does not acknowledge design flaws and clearly overstates the capacity of the administration to meet its pledges for political reasons and its caution with respect to SIFC, reiterated time and again in documents on SBA, is unlikely to find a listening ear.
Copyright Business Recorder, 2024