Pakistan's Economic Policy Makers Besieged

The blame of letting the economy go from bad to worse in now squarely put on the shoulders of the incumbent economic czar of Pakistan’s coalition government who is now dealing with IMF.

Despite an extremely worrisome economic prospect he did not refrain from employing rhetoric as his main weapon by emphasising that the government had a roadmap and policies for taking the country out of the current quagmire but mindful of mounting criticism he added that such policies could not be made public.

It is now widely acknowledged that his policies since he took over the office of the finance minister have resulted in imposing a punishing cost on the people and there appears to be no signs of the burden easing.

During his watch, prices of goods and services have galloped by 31.5 per cent and he was unable to do something about it though his bravado is well known. The price surge was exacerbated by the never-ending depreciation of rupee that has lost over 9 per cent to the dollar in the interbank just in the last two days.

The removal of subsidies and energy price adjustments are a sure recipe for high inflation adding to the pain felt by people as factories are closing down and job losses accumulating.

The main issue is that the finance minister is insisting to manage the economy according to his orientation that many consider is outdated. He is however fully convinced about the affectivity of his economic outlook and refused to budge from it even when the economy was nose-diving.

He clearly deviated from the IMF programme due to the ostensible object of trying to soften its demands and tested waters by employing populist measures such as reducing fuel and energy prices and tightly controlling the value of dollar but his attempts were rebuffed. There is hardly any doubt that at this crucial juncture he was not supposed to tinker with the IMF programme but his overconfidence resulted in such a fatal error.

He took all such actions despite a consensus that Pakistan cannot overcome its balance-of-payment crisis without IMF support. His policies are primarily responsible for deterioration of ties with the IMF though the official sources are trying to shift the blame on the IMF by stating that it is continuously shifting the goalposts.

With backs to the wall now the coalition government is trying to mend fences with the IMF and the latest step taken in this respect is SBP’s decision to increase its benchmark rate by 300bps to 20 per cent that is rated as the highest since 1996 and would make borrowing very tough.

A surcharge on electricity bills was announced to finance the power-sector debt as the SBP removed curbs on the exchange rate it had quietly re-imposed after letting the rupee depreciate in January to pave the way for the IMF mission’s visit for restarting discussions on the stalled programme review.

These measures followed fiscal adjustments, including an increase in the standard consumption tax rate and excise duty, reduction in energy subsidies and cuts in government expenditure to meet the budget deficit target.

The most critical factors delaying the IMF agreement related to the power sector sustainability through the permanent surcharge and complete free movement of the exchange rate, which meant the alignment of interbank, open and informal market operations of the foreign exchange market without any interference besides the central bank’s policy rate commensurate with the inflationary trend. The government approved the continuation of up to Rs.3.23 per unit special surcharge on electricity consumers to generate Rs.335 billion for debt servicing in the next fiscal year.

The power sector surcharge was considered critical to support the sector towards self-sufficiency and restrict the government finances to only budgeted subsidies. The government has already met other prior actions with the imposition of Rs.170 billion additional taxes for the current year and their continuation for next with over Rs.500 billion annual yield.

On the external front, the international rating agencies have downgraded Pakistan deeper into junk, with the nation’s dollar bondholders bracing for a potential default over dwindling reserves and scheduled debt payments.

No one is willing to step up in a big way without the IMF on board. As pointed out by the SBP, the early conclusion of the ongoing review under the IMF funding programme is critical to address near-term external sector challenges.

On successful completion, Pakistan would be entitled to 894 special drawing rights (SDRs) of the IMF with a calculated value of $1.2billion. The tranche had been delayed since October last year because of the government’s reluctance to allow free movement of the exchange rate, increasing the interest rate and full-cost recovery of power supply through additional surcharges and other adjustments to generate more than Rs.600 billion in less than two years.

The setback to Pakistan-IMF agreement efforts has pushed the government to a state of panic and it finds it difficult to convince the IMF to release a loan installment. The International Monetary Fund has changed interpretations of at least four prior actions ahead of rea¬ching a staff-level agreement (SLA) on the direly needed economic bailout. Greatly worried about the prospects of an agreement the Pakistani authorities have started to lament at, what they call, as maltreatment meted out to them by the Fund.

The official standpoint is that while the IMF wanted to support the poor publicly but had been insisting on some measures that would ultimately hit the low-income segments. Despite such hurdles the official machinery is apparently confident of clinching the agreement soon.
They however are intensely worried about Pakistan’s credibility gap and trust deficit following the reversal of agreed policy actions in the past.

The IMF is reported to have estimated an all-inclusive financing gap of about $7 billion for the current fiscal year against Pakistan’s projection of $5 billion. However, one official hoped that the State Bank of Pakistan’s foreign exchange reserves would go beyond $10 billion by the end of June from little over $3.1 billion at present.

The foreign exchange reserves apparently touched the bottom value of $2.9 billion but have started to slightly go up and after Pakistan secured $1.3 billion inflows in three tranches from Chinese banks, on top of the $700 million that has already been received. This would flow in two equal installments of $500m and then $300m with a gap of a few days. It is also anticipated that Saudi Arabia and the United Arab Emirates would also chip in over $3 billion.

On the external front, the international rating agencies have downgraded Pakistan deeper into junk, with the nation’s dollar bondholders bracing for a potential default over dwindling reserves and scheduled debt payments. No one is willing to step up in a big way without the IMF on board.

As pointed out by the SBP, the early conclusion of the ongoing review under the IMF funding programme is critical to “address near-term external sector challenges”. But for that to happen the financial czar of the coalition government is required to come back to the ground and prudently handle matters as there is certainly no other option left for the country to take advantage of.

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