Economic Recovery Miles Away

In a fit of anger that betrayed immense frustration the incumbent finance minister brushed aside the insinuations that the delay caused in finalisation of the Extended Fund Facility Programme of the IMF has anything to with Pakistan’s nuclear programme and that there would be no compromise on this matter.

He emphasised that nobody has any right to tell Pakistan that what range of missiles it can have and what nuclear weapons it can have. He added that Pakistan maintains its own deterrence and it will continue to do so.

The bitterness that crept up in the utterance of these words is the outcome of an extreme cause of worry that the critical lifeline expected to come from the IMF is inordinately delayed. The finance minister pointed out that the probable cause of delay is that each time the review is like a new programme which is very uncustomary with the IMF. He mentioned that it has been an extensive engagement: unusual, too lengthy, too long, too demanding but that it is nearing completion.

Revealing one of the reasons behind the delay in the IMF agreement, he mentioned that at the time of previous reviews, certain friendly countries have made commitments to bilaterally support Pakistan. Now the IMF is now asking that they should actually complete and materialise those commitments and this is causing delay.

Despite consistent assurances given by Pakistani official finance managers it is well known that all is not well with the country’s economic system. In this context it is pointed out that Pakistan’s external sector vulnerabilities have plunged into a completely untenable situation and it is yet to be determined how the upcoming 10th and 11th reviews under the IMF programme will be accomplished by the end of June 2023.

The situation is so bad that it would require the IMF to remain associated with Pakistan for pretty long time to come. It is looking quite certain that the problems confronted by the country will remain in place for the upcoming budget and would require IMF’s assistance to come to grips with them.

The external sector vulnerabilities are increasing by the day and apprehensions are there that point out to the surmounting difficulties that are staring in the face as no one knows how Pakistan would arrange $4 to $6 billion required to clear the containers stuck at the ports. This issue is very tricky and needs quick resolution and one of the solutions could be to open LCs for their release piece meal but the IMF would not agree with it as any kind of trade restriction is sternly opposed by the IMF programme.

If Pakistan and the IMF strike a staff-level agreement within this ongoing week, the Fund’s executive board is expected to take up Islamabad’s request for approval of the next tranche of $1 billion in the latter half of April 2023 but if it is further delayed the IMF’s executive board may meet in May 2023.

Keeping in view that Pakistani officialdom will be busy with budget-making exercises and it will become hard for both sides to conclude the fund’s review while the authorities are still considering the main contours of the upcoming budget for 2023–24.

This is not where matters end as Pakistan would still require IMF as it would need to fulfill the external debt repayment requirements ranging over $27 billion and the current account deficit (CAD) hovering around $5 to $6 billion at least amid the possibility of increased import needs.

The current problems are huge and many economists suggest that the development programmes would have to be given up for at least twenty years for want of funds. They also mention that a 15 per cent cut in defence budget has become an absolute necessity though this measure is hard to achieve as is borne out by past experience.

The finance managers of the country are hard-pressed to convince the IMF to reduce external additional loan requirement to $6 billion amid government’s desire to give Rs.150 billion subsidised petrol package to motorcyclists.

The apparent solution to this difficulty as IMF will certainly object to the subsidy it is proposed to recover the subsidy amount through levying Rs.25 to Rs.50 per litre on car owners. The proposal would result in raising the petrol price in the range of Rs.300 to Rs.325 per litre for car owners but reduce it to Rs.250 to Rs.225 per litre for motorcyclists.

It is also mentioned that Pakistan found a middle ground on the issue of external financing gap as against the IMF’s earlier estimates of $7 billion external financing gap, both sides have now agreed to reduce the estimates to $6 billion.

The $1 billion reduction in financing needs means lowering the new loan requirement by the same amount and the reduction has been achieved by marginally reducing the projection of the current account deficit and lowering the foreign exchange building requirements.

The current account deficit is now being projected around $7.7 billion as against the earlier IMF projection of $8.2 billion and another $500 million is being reduced against the projected foreign exchange reserves requirement for the current fiscal year. The IMF is now willing to consider the foreign exchange reserves level equal to 1.7 months of prospective imports cover.

In line with the IMF’s requirements Pakistan so far has increased the electricity prices, gas prices, fuel prices, devalued the currency and increased the interest rates by 3% to record high level of 20%. As far as the interest rates go it is not certain whether the increase will stop here or go up as it appears that they may. After the recent hike, the real interest rate was slightly positive compared to the core inflation but the IMF calculated the inflation adjusted positive interest rate from the headline inflation rate. Under the previous SBP regime the bank had agreed to link the rate with the headline inflation yet the headline inflation in February hit a 50-year high of 31.5%. At the beginning of the IMF programme in 2019, the policy rate stood at 10.75%, which has almost doubled.

Pakistan requires basic structural changes in the economy that would entail increasing tax to GDP ratio to 17 per cent. Currently tax-to-GDP ratio stands at 10% which has deteriorated significantly compared to June 2018 when it was 13%. At a 17% tax-to-GDP ratio, Pakistan would have collected Rs.14.3 trillion at today’s economy size. This year’s revised tax target for the FBR is Rs.7.640 trillion which is equal to just 9% of the GDP. Low collection, however, means higher borrowing by the federal government. The FBR is also required to increase the ratio of compliant taxpayers to 3.5 million by June 2024 – a number that currently stands at 3 million. There is also no progress in the monitoring and reporting of tax arrears. The FBR is also falling behind the target of resolution of refund claims. It was projected that by June 2024, at least 50% of the refund claims are resolved within three months of their request but the current ratio is only 15% much below the projected target.