Beating the system to get IMF’s blessings?

November 13, 2019

The IMF has forbidden the government of Pakistan from borrowing from the central bank during its programme period.

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Special Assistant to the Prime Minister for Information and Broadcasting Dr. Firdous Ashiq Awan, Advisor to Prime Minister on Finance, Revenue and Economic Affairs Abdul Hafeez Sheikh, Federal Minister for Economic Affairs Muhammad Hammad Azhar and Chairman Federal Board of Revenue Syed Mohammad Shabbar Zaidi addressing a joint press conference on November 11. -APP

LAHORE: In Pakistan, polarisation in political views is normal; however, a new normal is emerging in the shape of a growing divergence over the status of economy as for the government every economic indicator is blinking green, but for the opposition it’s flashing red.

Even the accolades by the International Monetary Fund (IMF) are disputed by the opposition and with some justification. The government achieved the primary surplus in the first quarter of this fiscal against all odds. Pundits were predicting much higher primary deficit than the IMF target of 0.7 percent of the GDP in the first quarter.

The economic planners did not improve this target because of any prudent economic policy. They in fact engineered it by going for very heavy borrowing from the State Bank of Pakistan in the 4th quarter of last fiscal. That huge amount was not needed for that fiscal but was reserved to cover fiscal lapses in the first quarter of this fiscal.

The IMF has forbidden the government of Pakistan from borrowing from the central bank during its programme period. But while this was being agreed at the time of negotiations there was no such restriction to borrow before the start of the extended fund facility. So the government borrowed enough to carry it to the next fiscal, enabling itself to post a primary balance of Rs200 billion. The target for the next quarter is Rs350 billion. The government could achieve this or come close to it from this surplus. Despite this engineered planning as pointed out by the opponents of the government it has surpassed the IMF target. However this technical victory cannot be termed as an improvement in the economic outlook.

Engineering accounts books is nothing new in Pakistan. The past government that took power in June 2013 increased the fiscal deficit to a new height by arranging around Rs500 billion from SBP on June 30, 2013 and clearing the dues of independent power producers. The budget deficit was technically blamed on Pakistan People’s Party government that was in power for most of that fiscal year. This time around most of the period in power belonged to the PTI and it did the same thing but along with the discredit of highest ever fiscal deficit in our history.

What puzzles most is the gradual but slow increase in foreign exchange reserves although there is still a wide gap between exports and imports. The hot money pursued by the central bank has played the trick. Ironically the IMF seems to have no objection on the selling of treasury bonds to the foreign funds. If a foreign fund manager remits $1 million to invest in Treasury bill of any duration it will earn 13.25 percent interest on the maturity of that bill. Ten million dollar means an investment of Rs155 billion. If the maturity period is one year the investor would get on average Rs155 billion plus Rs20 billion in interest.

So after a year it would be able to repatriate this Rs175 billion in dollars. The investor would continue investing as long as the dollar is relatively stable. The treasury bonds are to be cashed after maturity so there is no harm on earning over 13 percent on dollars invested in Pakistan’s treasury. The fund managers are unable to get even half this interest rate from anywhere in the world. In developed economies this rate is either in minus or 1-2 percent. The question is that for how long we would be able to pay such high interest in foreign currency. If they invest $1 billion in one year they will take back $1.13 billion after the maturity of treasury bill. So in fact we have set a mechanism of ensuring net outflow of 13 percent additional foreign exchange for every dollar invested in treasury bills.

This would bleed Pakistan and IMF would not mind it. In fact they would be able to control Pakistan’s economy with more vigor.

The efforts that the economic planners are making in pursuit of hot money should have been used in devising policies to increase our exports. We are at the same place in export at which we were when the dollar was valued Rs105 about 2 years back.

There is definitely something wrong with our exports if we are unable to increase them despite a massive devaluation. The next step is to sell the profit-making public sector enterprises that would help meet targets agreed with the IMF.

It is another matter that after a one-time cash injection there will be no regular income for the government and it will be saddled with loss making entities only.

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