In all likelihood, Pakistan’s economic front would be riddled with cracks after the completion of the second review of the International Monetary Fund (IMF) programme under $6 billion Extended Fund Facility (EFF).
The review that’s going to take 10 days to complete starts today Monday, February 03, 2020).
The market sentiments are not picking up and so are not the economic activities. After the keeping policy rate unchanged at 13.25 percent, the central bank hinted that the stage had not yet come to ease out monetary tightening that will be pre-requisite to restore private sector confidence in order to boost up sluggish economic activities.
This decision of keeping policy rate unchanged will play havoc with budgetary estimates as the interest payments on loans are going to eat away more than Rs3.2 trillion in the current fiscal year. After providing shares to provinces under NFC Award, the center has started its budgeting with negative from day one.
The persistent and longer slowdown will have far-reaching negative impacts and there is need to devise a strategy to avoid plunging into a full-scale stagflation as it was now looming large on the economic horizon of the country.
At this juncture, the Federal Board of Revenue (FBR) was facing mammoth revenue shortfall of Rs218 billion in the first seven months (July-January) period against revised target amid uncertainty about FBR chairman Shabbar Zaidi’s leave on medical grounds raising questions whether he would stay or quit. The Zaidi has been suffering from severe anxiety and one thing is confirmed that he will not be attending this review talks/article IV consultation with the IMF mission.
Alone in January 2020, the FBR could fetch just Rs321 billion in revenues in accordance with provisional collection figures against the desired target of Rs425 billion, indicating the shortfall of just one month stood at Rs104 billion. In the first six months (July-December) period the FBR had collected Rs2,083 billion against the downward revised target of Rs2,197 billion.
With the consent of IMF, the government had already slashed the annual tax collection target from Rs5.5 trillion to Rs5,238 billion. Now the IMF team might recommend the government to slap more taxes in the mini budget or cut down expenditures in order to keep the budget deficit especially primary deficit within the envisaged limits.
So the expected outcome of upcoming talks will the IMF staff’s demanding of Pakistan to undertake “adjustments” on the fiscal front to align with new realities in a bid to achieve fiscal discipline. Earlier, there were expectations that the State Bank of Pakistan (SBP) would indicate moving towards loosening monetary policy but it kept the policy rate unchanged at 13.25 percent. Now the economic managers are under the whole pressure of making adjustments on the economic front.
A mini-budget in shape of fiscal adjustments will be finalised during the review talks with the IMF. Pakistani authorities argued there was no capacity in the economy to bear any more burden of increased taxation so will try their best to convince the IMF for slashing down the FBR target. But the IMF, known for its one-size-fits-all approach for all policies, might bring it on the table asking for taking additional taxation measures, if required, to keep the budget deficit especially primary deficit within agreed limits.
One possible avenue could be increased reliance on non-tax revenue target as the Privatization Commission was undertaking an ambitious plan to privatise six state-owned entities within the current fiscal year. One of the major transactions will be the strategic sale of two RLNG plans within the current fiscal year with the possibility to get upfront receipt of sale proceeds.
So far 12 interested parties have been pre-qualified out of which no big giant from China and Saudi Arabia exist against earlier expectation. The major interested investors belonged to Qatar, Japan, Thailand, Malaysia, and UAE as well as some local parties. The Privatization Commission plans to open up desk for interested investors for due diligence within next two weeks and it is hoped that this strategic sale will be accomplished by April 2020. Auction of some properties was also on cards but the privatisation of two RLNG plants could fetch over $2 billion into national kitty. When a concerned official was asked why it took so long to privatise these two RLNG plants, he said there were hundreds of problems such as the land was not declared as commercial, water availability for the plants was not signed with the concerned department, etc so investors were reluctant to enter a deal without the resolution of such issues on the ground.
“Now everything has been done and it is hoped that the RLNG plants will be privatised before end-June 2020,” said the official. Secondly the government is relying upon increased profit from SBP during the current fiscal year.
Pakistan and the IMF will also finalise initial draft of the upcoming budget for 2020-21 after making adjustments in the shape of a review of the current fiscal year’s budget.
Second area of interest of the IMF will be the energy sector and improving performance of other public sector enterprises. The monster of circular debt continued to haunt the government’s policymakers, who claimed to have put brakes on the pace of accumulation, but seemed unable to achieve the desired target so far. On the front of improving public sector enterprises, the government has so far not moved to hand over certain entities to Sarmaya-e-Pakistan to convert loss-making entity into profit-making institutions with the help of public private partnership.
Finally, the increasing inflationary pressures were fuelled mainly by supply constraints and misgovernance. Although, the utility prices are causing pressures on headline inflation but the food prices were escalating because of administrative mismanagement and at least the government should focus towards resolving this issue because this rising inflation has put enormous pressures on lives of the poorest of the poor by eroding their purchasing power.
The writer is a staff member