The first post-programme monitoring IMF Staff Mission Report has just been released. It confirms what we have been highlighting in these pages: the weak quality of economic policies and financial management. We have argued that if there were any gains in stabilisation of the economy during the tenure of the IMF programme, they were largely illusory in character, facilitated by creative accounting, one-off transactions and by the substantial decline in international price of oil.
The most significant disappointments have been (a) the complete lack of focus on addressing the decline in exports; (b) excessive external borrowings to artificially build up foreign exchange reserves; (c) a continuing narrow tax base; (d) weak and faulty debt management; (e) failure to check the steady accumulation in losses of public sector enterprises (PSEs); and (f) the rise in circular debt in the power sector to almost one trillion (growing by almost Rs 550 billion during the tenure of this government), without accounting for the growing circular debt in the gas sector.
It is not surprising that economic conditions have worsened in the aftermath of the IMF programme.
The tenor of the report is clearly very negative and pessimistic about the future prospects for the economy up to 2022-23. Indicators of the downside nature of the projections are as follows:
(i) As of last month, the report makes a startling disclosure that net international reserves have already become negative, as compared to a positive $7.5 billion in September. This is the first indication that gross reserves have already reached an unsustainably low level and the country will face a serious challenge in the medium term to service its external debt and other obligations.
(ii) The report projects that gross foreign exchange reserves will fall from $16.1 billion to $12.1 billion by the end of 2017-18. In fact, reserves are down already to this level as of early this month, with four months of the year still to go, underlining the danger that they could fall further.
The report does highlight that if the external financing requirements for the remainder of the year are not realised, gross foreign exchange reserves could fall to $9.4 billion by the end of 2017-18, barely 50 per cent of the benchmark for sustainability of four months cover.
If the shortfall persists, reserves could be as low as $7.1 billion by end-June 2023. This level would not even be adequate to provide import cover of one month. As such, there is the imminent risk that the year 2018-19 could witness the onset of a severe financial downturn.
The extremely worrying finding of the IMF Staff Report is that even with relatively optimistic projections beyond 2017-18, Pakistan will still find itself in a highly challenging position, with reserves projected at only $10.4 billion by the end of 2018-19 and only $9.5 billion a year later.
The optimistic nature of the balance of payment projections is underscored by, first, low growth rate of imports of five per cent in 2018-19 despite the peaking of CPEC machinery imports and the prospect of higher oil prices.
Second, even in the absence of any major move on the exchange rate front, exports are expected to continue buoyancy with a growth rate of 12 per cent. Third, remittances are projected to become buoyant once again and show a jump of seven per cent in 2018-19. All this is expected to contribute to a reduction in the current account deficit from 4.8 per cent to 4.4 per cent of the GDP.
Furthermore, to cover the financing needs the net inflow on the financial account is expected to jump up by a sizable 15 per cent in 2018-19. This will be due to a big rise in FDI of 19 per cent and of 52 per cent in net overall external borrowing. However, ostensibly despite these rather favourable assumptions, the report argues that reserves will still fall. Is the objective to show that even in the, more or less, best case scenario Pakistan’s economy is still likely to be confronted with an anxious future?
A new practice has been adopted in the IMF report. The recommendations for strong contractionary fiscal and monetary policies to stabilise the economy are followed by the penning down of the ‘Authorities Views’.
These views are in sharp contrast to the IMF recommendations and continue to focus, perhaps obliviously, on taking the economy to a higher growth trajectory of six per cent or more.
There is seemingly a fundamental disagreement between the IMF and the authorities on the policy stance to be adopted in the medium run.
The fundamental question is why the Staff Report has presented such a bleak picture of the prospects for Pakistan’s economy. Historically, the quarterly review reports during the tenure of the EFF used to be positive in nature and sympathetic to views of the Authorities.
An attempt was made to highlight the successes in reform efforts apparently achieved and generously grant performance waivers.
Now, with this report, Pakistan’s access to international capital markets (the maturity periods of potential commercial borrowings or rollover of swaps will get shorter and the terms and interest rates more stringent) and to concessional financing from multilaterals and bilaterals will be greatly diminished.
Why has this been done? First, in the report the fund clearly states that the CPEC should be slowed down so that buildup of external liabilities remains more manageable. Second, possibly under pressure from the largest member of the IMF Executive Board, a kind of ‘doomsday’ picture of the near future has been presented so that the authorities rush back to the Fund as soon as possible for support.
At that time, more gruelling economic and non-economic conditionalities could be introduced as prior actions for Pakistan to take to enhance the debt repayment capacity in the medium run. For example, the report already presents a scenario in which the value of the rupee is adjusted downwards by 30 per cent in 2018 to ward off the possibility of a sudden crumbling of reserves due to prevailing conditions.
The authors are former federal minister and governor of the State Bank of Pakistan.
Published in Dawn, March 19th, 2018