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Economic notes

May 21, 2019

A gloomy beginning

Opinion

May 21, 2019

One week after the IMF announced a staff-level agreement on a $6 billion, 39-month programme to support Pakistan’s economic policies the economic landscape has not changed for the better. The uncertainty that has gripped the country for more than two years, and which was billed to end after the programme, continues to mar the economic environment. The celebratory mood typically witnessed on the occasion was sourly missing all across the economic arena.

It all started when the scheduled conclusion of talks on May 10 was postponed with a terse statement that ‘talks would continue over the weekend’. Some news reports suggested that the prime minister was not happy on certain conditions and a last-ditch attempt was made to seek softening from Washington. Alas, this was not forthcoming. Then the finance adviser made a brief appearance on official TV and announced the agreement. He gave a short account of the programme. On the other hand, the IMF issued a standard press release from Washington announcing the staff-level agreement. All this was out of line with the usual practice. The country finance minister and the IMF mission chief normally hold a press conference giving details of the agreement and taking questions from reporters. An ensuing debate on the programme enables people to understand the conditionalities.

Throughout the week, markets and investors were exasperated for lack of clarity as to what has been agreed under the programme. The available information -- IMF press release and the finance adviser’s interview -- were woefully short on details. It was, therefore, not surprising to see economic agents finding themselves on the edge. The nervousness was visible as the stock market lost more than 1500 points, with a deepening sense of gloom. The forex market was particularly topsy-turvy. While the inter-bank rate was stable, the curb market was erratic. Its volatility led to public anxieties to a point that the prime minister was persuaded to hold a meeting last Wednesday evening with the leaders of association of exchange companies. This was an extraordinary and unprecedented step. Reportedly, the meeting agreed that open market would maintain its rate within the range of Rs143-Rs144.5.

On Thursday, in a dramatic move, the inter-bank rate rose from Rs141.7 to Rs146.5. There was frenzy and panic. Investors were asking why a day earlier the prime minister was negotiating rate setting with exchange companies in a range so significantly out of line with the one the central bank was to announce the following day. This major exchange rate adjustment was explained by the SBP by a standard statement saying: ‘this movement reflects demand supply in the foreign exchange market and will help in correcting market imbalances’. Last Friday saw further weakening of the rupee as it closed at Rs149 in the inter-bank and Rs151 in the open market.

It is curious to note that Asad Umar, the former finance minister, in early April had categorically assured that the current value of rupee was equal to its real value and ruled out any more adjustments. On Friday, Umar also said that till he left the talks there was no understanding with the Fund regarding rate adjustment.

Ordinarily, a Fund programme is supposed to bring stability and certainty in the economy. Undoubtedly, the macroeconomic imbalances were challenging but none was close to a level warranting such a disruptive start, particularly when it is not clear whether the implementation of the programme has started. There is no reason why this programme should not start on a positive note. Yet, we see an unfortunate series of events unfolding in its wake and leading to exacerbating an already precarious economic environment. What could be the possible reasons for such unpleasant outcomes. We believe at least four reasons have contributed to the situation in hand.

First and foremost, lack of communication between economic managers and markets, investors and people. There is speculation everywhere regarding the contents of the programme. Clearly, there are prior actions agreed for final approval of the programme by the IMF Board. Why is it not possible to convey this information in a transparent fashion? Everyone is drawing their own conclusions.

Second, lack of communication has led to significant misreading of the programme, while no efforts were expended to challenge it. For instance, analysts are surmising that the programme would be approved only after a green signal from the FATF review. This is not borne out by the press release where it was simply stipulated that the country would ‘continue anti-money laundering and combating the financing of terrorism efforts’. A similar stipulation was also contained in the previous programme. Then there was also a criticism of the condition that the country should obtain confirmation of its international partners’ commitment. This was construed as the Fund asking for roll-over from others and not doing so for its own resources. The simple answer is that the Fund is not asking this, but the authorities have indicated that the falling maturities would be rolled over (and thus should not be included in financing gap). A confirmation to this effect was warranted. On its part, the Fund programme itself is the support to cover its falling maturities from the past programme.

Third, those opposing the programme have found an uncontested field particularly in the backdrop of market reactions and volatility in the forex market. The opposition parties have finally achieved a critical mass to think of launching a movement against economic mismanagement. Finally, the ownership of the programme is lacking. The cabinet members and other government officials are either reluctant or tentative to defend the program. On Sunday, while in Peshawar, the prime minister for the first time made some positive remarks about the programme and defended his government’s decision to conclude it. He expressed the hope that the economic situation would soon be brought under control. He also indicated that he may take the nation into confidence on the subject.

More difficult moments under the programme lie ahead. It is imperative that the government designs a persuasive narrative to convey to the people that the programme is essential to restore the health of the economy and that after initial pains this step will lay the foundation of a stable and growing economy.

The writer is a former finance secretary. Email: [email protected]

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