The government needs to renegotiate with the International Monetary Fund (IMF) the terms and conditions of $6 billion Extended Fund Facility (EFF) based on demand compression, subsequent to coronavirus outbreak and the resultant lockdown to prop up demand in the country.
This was stated by former adviser to Finance Ministry, Dr Ashfaque Hassan Khan and Dr Abid Qaiyum Suleri, Executive Director, Sustainable Development Policy Institute (SDPI), while speaking at Aaj News programme "Paisa Bolta Hai" with Anjum Ibrahim.
Suleri stated that the government should not continue with aggregate demand compression policy, and avail the IMF policy on the COVID 19 response and use $1.4 billion new programme for the pandemic. He said that when a facility was available, Pakistan must use it and should not go into the EFF for the new programme.
Suleri emphasized that the EFF based on demand compression must be reviewed. He said that previously cut in policy rate was being discussed in business as usual but now it was not business as usual and reduction in policy rate would reduce government debt servicing cost, and thereby creating space for it to spend on pandemic especially if it prolonged.
Additionally, Suleri said that the IMF had also been flexible in terms of fiscal deficit with regards to coronavirus spending and would not hold government responsible for it.
He said that according to his information, the government would use the Benazir Income Support Programme (BISP) data of 2010 as well as the for the last two years' data available of other organizations and the threshold is also being relaxed to cater for daily wagers and the unemployed workface.
Ashfaque Hassan Khan stated that the IMF programme was by design demand management programme and monetary and fiscal policies were directed towards achieving demand compression in the country.
He added that as in the post-coronavirus demand had totally collapsed across the world and developed and developing economies were pumping money in their economies to prop up demand, Pakistan needed to renegotiate with the IMF to provide support to the economy in this difficult and challenging time.
When contacted, an official on condition of anonymity stated that given the post-coronavirus situation in the country, targets of the IMF programme were no longer relevant for the government at least for the next three months, and this was also evident from the measures taken in the government's economic package.
Later talking to Business Recorder he further explained that one instrument to contain demand aggregate demand was to keep the interest rate high and claimed that Pakistan's interest rate was the highest in the world.
That is why, he added that everyone including the industry has been demanding cut in the policy rate. However, he added that although the State Bank of Pakistan has reduced interest rate by 2.25 basis points but it was reluctant to bring it down to single digit, perhaps, owing to the IMF programme.
He added that given the challenges the economy was facing, the government was well advised to renegotiate the terms and conditions with the IMF of the EFF programme. He said, it was surprising that the Ministry of Finance had recently got approved budget strategy paper from the federal cabinet with revenue target of over Rs6.3 trillion, which envisaged Rs1 trillion additional tax measures.
He said that the government would be unable to achieve more than Rs4.4 trillion revenue collection, given the depressed economic environment (economic growth after the coronavirus was likely to remain around two percent) in the current fiscal year.
If this was the policy, he said that it would further impact the economy of the country. As the next fiscal year revenue collection target approved by the federal cabinet on the proposal of Finance Ministry is totally unrealistic, therefore the government also needs to renegotiate fiscal target with the fund for the next fiscal year, he added.
Furthermore, he said given the collapse of oil prices in the international market, Pakistan's electricity production cost would also be reduced, hence the government must reduce electricity tariff and gas prices for both household and industry to reduce the input cost.
He said all these measures would increase economic activity and minimize the cost of coronavirus on Pakistan's economy. He was also optimistic that inflation would likely come down sharply by the end of current fiscal year as was the case, when the oil prices plummeted during June-July 2014.