To save the loan programme from complete derailment, the government will have to deliver on the promises, made to International Monetary Fund (IMF), of improving revenue generation, stemming cash-bleeding in energy sector, and ensuring timely rollover of Chinese loans, as the genie is now out of the bottle.
There are two possibilities. One is to undertake all measures in next two to three weeks and the other to link second and third reviews so the government gets until next May/June (next budget) to accomplish all the targets. Only that would pave the way for release of next tranche under $6 billion Extended Fund Facility (EFF).
Despite deafening claims by the ruling elite the economy got stabilised in the last six to nine months, the readers were being regularly informed that this review would expose the cracks on the economic front and it would not be as smooth as being claimed by the economic team of the incumbent regime.
The problems is that it is the first time in the history of Pakistan that such an inexperienced team, sitting in Ministry of Finance and Federal Board of Revenue (FBR), is negotiating a deal with the IMF at the technical level. Although, Advisor to Prime Minister on Finance Dr Abdul Hafeez Shaikh and Governor State Bank of Pakistan Dr Reza Baqir are familiar with the ins and outs of the Bretton Wood Institutions (BWIs) such as the IMF and World Bank, a weak technical team at Q Block (the area in federal capital where finance ministry offices are located) made it harder for them to manage minute details of the fund’s programme.
Pakistan and the IMF team held parleys from February 3 to 13 here in Islamabad for completing second review under the EFF, but both sides could not strike a staff level agreement.
Those, aware of the IMF’s ways, knew this fact that the review completion required staff level agreement. Although, the IMF praised the government for meeting end-December targets that were also aimed at providing cushion to the government to play with domestic gallery, it indicated simultaneously that “steadfast progress on programme implementation would pave the way for IMF’s Executive Board consideration of the review”.
First of all, the FBR’s performance jolted the very basis of the programme because the tax collection machinery faced such a mammoth revenue shortfall that it restricted fiscal space for making any adjustments.
Those who have designed the IMF programme argued the government envisaged FBR collection target at Rs5.5 trillion and the FBR successfully managed to convince the IMF to slash down its target to Rs5.238 trillion on eve of first review.
The realistic target should have been around Rs5 trillion but now the FBR started its argument it could collect Rs4.5 trillion or Rs4.6 trillion at a time when it is still running as a rudderless ship after unceremonious quitting of Shabbar Zaidi as chairman apparently on health grounds. Now Prime Minister Imran Khan will have to take decision on appointment a new chairman FBR as early as possible.
There is another proposal under consideration related to appointment of advisor to Prime Minister on revenues and the top contender of this slot is Haroon Akhtar Khan. So whatever the government intends to do it should decide on the front of the FBR because uncertainty will serve no purpose rather it will dent revenue collection efforts.
On the fiscal front, another issue is related to fiscal adjustment as the FBR was expected to face shortfall in the range of Rs1,000 billion but on the other hand the SBP profit ballooned to Rs426 billion in the first six months (July-December) period of the current fiscal against meager amount of Rs63 billion in the same period of the last fiscal year. The FBR’s performance on revenue collection front as well as lack of a clear roadmap became one of the major stumbling blocks in the way of securing a staff-level agreement between Pakistan and the IMF.
Secondly, the tariff hike in the cash-bleeding energy sector had become another headache for the economic managers as the Prime Minister had announced there would be no increase in gas and electricity tariff at a time when the IMF team was in Islamabad to finalise its second review on the basis of which its Executive Board would approve the release of next tranche worth $452 million. Now the government will have to come up with a comprehensive plan including hiking gas and electricity tariff only then the review can be concluded.
Thirdly, the delay in rollover of Chinese loans has also created problems for finalising Memorandum of Financial and Economic Policies (MEFP) draft between the two sides. The IMF is also asking Islamabad to reduce its reliance on Chinese trade ties. In addition, the fund mission also warned Pakistan of spillover effect of a slowdown in Chinese economy, because of coronavirus outbreak, might negatively affect the country’s endeavours for improving its GDP growth in the current fiscal year.
On the conclusion of the visit, the IMF mission stated,”Both sides made significant progress in the discussions on policies and reforms and in the coming days’ progress will continue to pave the way for the IMF Executive Board’s consideration of the review”.
“The macroeconomic outlook remains broadly as expected at the time of the first review. Economic activity has stabilised and remains on the path of gradual recovery.”
The fund further said the current account deficit had declined, helped by the real exchange rate that was now broadly in line with fundamentals, while international reserves continued to rebuild at a pace considerably faster than anticipated.
Inflation should start to see a declining trend as the pass-through of exchange rate depreciation has been absorbed and supply-side constraints appear to be temporary, the IMF said. It added that fiscal performance in the first half of the fiscal year remained strong, with the general government registering a primary surplus of 0.7 percent of the GDP on the back of strong domestic tax revenue growth.
“Development and social spending have been accelerated,” the fund said.
Time has come for the government to deliver the goods on the economic front otherwise they run a huge risk of jeoparising the much-needed IMF loan programme as well as the wobbly economy of the country.
The writer is a staff member