To be (in an IMF programme) or not to be (in an IMF programme) – that is the question. Following Hamlet’s contemplation, the answer is ‘to be’ because the alternative could be worse.
With the Consumer Price Index at a 14-year high, the policy rate (only half a per cent less than that of default-hit Sri Lanka), the highest trade deficit, the historically low exchange rate of the rupee, and the central bank’s foreign exchange reserves in single figures (less than five weeks’ import bill), Pakistan is desperately waiting to get its IMF Extended Fund Facility programme resumed. Without resumption of this programme, Pakistan can neither secure external financing from other multilateral institutes nor from friendly countries. Likewise, without a letter of comfort from the IMF, Pakistan’s credit rating will remain negative.
Different cabinet members have been claiming for the last few weeks that the resumption of the IMF programme is only a few days away – if wishes were horses. One should acknowledge that, albeit with a delay, and putting its political capital at stake, the coalition government has taken the painful decision of increasing the prices of petroleum products. However, merely doing away with the oil subsidies will not help get the IMF programme resumed.
To avail an IMF bailout package, a country makes two types of commitments: quantitative targets (known as performance criteria and indicative targets) – mostly in domestic currency but some in US dollars, and structural benchmarks (structural reforms). Progress against these commitments is assessed during a review, and a report is presented to the IMF executive board, which decides whether to release the loan tranche. Unless the board approves a waiver, any missed commitment becomes a ‘prior action’ (mandatory measure) that a country has to take to get its loan tranche released.
During the last review (sixth review in February 2022), the IMF declared Pakistan’s overall performance “uneven”. Pakistan had met all but four (out of 14) quantitative targets. However, there were major gaps in implementation, particularly in the fiscal and structural reform agenda. Only one structural benchmark was met on time, five were met with delay, and seven were not met.
The review noted that those gaps arose amidst challenging circumstances, including the Covid-19 pandemic and spillovers from Afghanistan, but also due to a waning decisiveness to push forward agreed reforms.
To get its fourth loan tranche released, Pakistan availed certain waivers and met five prior actions during November 2021-January 2022. A mini-budget (finance bill with the GST reforms) was adopted, the government raised the development levy on petrol and diesel, the State Bank Act was amended, ex-post audit of the procurement of Covid-related supplies and social payments made during FY2020 was conducted by the auditor general of Pakistan, and key information on Covid-related procurement contracts was made public on the PPRA website.
After receiving the fourth loan tranche, the PTI government deviated from the energy sector structural benchmarks and announced a blanket subsidy on fuel and electricity. The PTI government provided this subsidy for five weeks (March 1 - April 9) till it lost majority in the National Assembly and the coalition government came into power. Partly the energy subsidy but also many other unmet commitments of the PTI government irked the IMF.
The incumbent finance minister committed to rolling back those subsidies without ado during his meeting with IMF executive directors in Washington (April, 2022) and during the IMF staff-level meetings in Doha (May, 2022). However, the coalition government took nine weeks (April 10 - June 15) to take allies into confidence and let go of energy subsidies. This delay not only cost the coalition government a loss of dollars (in importing the expensive fuel) and a loss of rupees (amount of subsidy) but a credibility loss too. After giving its words to the IMF’s highest level (executive board), the government could not roll back the energy subsidies in April.
The trust deficit between the government and the IMF further widened when the latter found that the federal budget FY2022-23 was not in line with the policy measures that Pakistan had agreed upon during the staff level meetings in Doha (May 2022). Among others, the IMF had concerns about petroleum development levy, personal income tax rates, and over-ambitious provincial surplus targets in the federal budget. Consequently, the federal budget was revised before the parliament adopted it to address IMF’s reservations.
The recent announcement of the Punjab government to provide free electricity to lifeline consumers (though halted by the election commission of Pakistan till by-elections) has further eroded the trust between the government and the IMF. The IMF encourages targeted subsidies but does expect a prior consultation on the implications of such measures on fiscal imbalance.
I gave this longish background to explain the circumstances in which the government has to complete a set of prior actions and meet quantitative targets/structural benchmarks for the successful completion of ongoing review and sign a staff-level agreement (SLA) with the IMF.
As mentioned earlier, rolling back fuel subsidies is just one of the measures for resuming the IMF’s programme. It will be followed by an increase in electricity and gas tariffs (to recover the full energy cost). Besides energy reforms, the other important prerequisites include securing a commitment from the provincial governments, through an MOU with the federal government, that they (provinces) would generate a provincial surplus.
Spending a maximum portion of new loans to service the existing loans (primary budget balance); preparation of a plan to establish an appropriate development finance institution to support the eventual phasing out of the State Bank’s refinance facilities; parliamentary approval of a new state-owned enterprises law in line with the IMF recommendations; adoption by parliament of amendments in the Ogra Act (giving the regulator an autonomy to determine the prices of fuel); avoiding the practice of issuing new preferential tax treatments or exemptions; and cabinet approval of the second phase of energy subsidy reforms are some of the other structural conditionalities that the government has to meet for a successful conclusion of the SLA.
Among governance/anti-corruption reforms, the structural benchmarks include establishing a robust asset declaration system. The high-level public officials (grade 17-22 civil servants, elected and unelected members of the federal cabinet) would have to declare their assets. Another structural benchmark for strengthening anti-corruption systems is a mandatory public display on the PPRA website of the information on beneficial ownership of companies that are awarded public procurement contracts for Rs50 million and above. These two benchmarks would add transparency to our otherwise tainted anti-corruption regime.
The structural benchmark on social safety nets and providing targeted subsidies are regularly applying the mechanism for periodic inflation updates of all BISP cash transfers; and enhancing the value of educational cash transfers under BISP.
The good news is that the government is working to meet most of the prerequisites mentioned above to conclude the SLA without further delay. The bad news is that this ‘work in progress’ will not be completed in the next few days. I read that the earliest an SLA can be signed is the first week of August.
The next loan tranche would be released after the SLA containing a memorandum of economic and financial policies (MEFP) is approved by the IMF’s executive board. This approval may take a few more weeks. However, signing an SLA would give positive signals to the markets, support the value of the rupee against the US dollar, and facilitate an inflow of external assistance from friendly countries. That is how ‘to be (in the IMF programme)’ can help us as the alternative – coping with the economic meltdown without the IMF – could be worse.
The writer heads the Sustainable Development Policy Institute.
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