Reading the IMF programme

Published July 4, 2019
The writer is a member of staff.
The writer is a member of staff.

THE executive board of the IMF has approved Pakistan’s request for accession to a three-year, $6 billion programme. The programme now begins and the first tranche of the money will be transferred into State Bank accounts within days.

Equally important, the programme document that details all the commitments agreed to between the Fund and the government of Pakistan will be uploaded onto the Fund website, also within days. This is a crucial document and all those with a keen eye on Pakistan’s economy, and with an interest in knowing where things are expected to go in the future, will give it a careful read. So I thought I’d share some tips on what sort of things to look for in the document that a layperson could understand, and that will reveal important details about what to expect for the next three years. This is not some sort of a definitive list, and others may well point out other areas that will also be of critical interest.

First thing I would look for are the projections contained in the document for the external financing requirements of the country over the next three to five years. Since debt and its management have become such a critical agenda item in this government’s economic self-awareness, this figure will tell us what sort of dollar inflows will be required all this year and the next two years to manage financing requirements. These include debt-service obligations, repayment of principal amounts as well as private-sector liabilities that will need to be met from the country’s foreign exchange reserves.

The fact that this programme has been drawn up after an in-depth examination of CPEC financing requirements means that in this programme document we will get a first, authoritative look at what sort of financing commitments Pakistan has to meet to pay for CPEC investments under the early harvest programme that have been by now largely completed.

To understand the figures and projections given in the programme it would be helpful to see how this figure has been reported in previous IMF documents.

To understand the figures and projections given in the programme document it would be helpful to see how this figure has been reported in previous IMF documents. I have written about this in the past but it is important and bears repeating.

There are three Fund documents prior to the one that is about to be released where the projections for external financing requirements are given, and these vary sharply in each. One is the post-programme monitoring report issued in March 2018, after Pakistan had completed a three-year programme that began in 2013. The other was an Article IV report released in July 2017. And the third is the last review of the previous IMF programme that was issued in October 2016. Between them, these three documents provide three separate snapshots of what the projections were saying for Pakistan’s gross external financing requirements, and something interesting happened when you looked at all three one after another.

In October 2016, the projections showed that Pakistan’s external financing requirements will rise from $15.8 billion in FY2019 to $17.5bn in FY2020. For perspective, we have just completed FY2019 and have just begun FY2020.

By July 2017, the projections in the Article IV report showed that the same requirement will rise from $16.9bn in FY2019 to $20.5bn by FY2020. And then, less than a year later, when the post-programme monitoring report was released in March of 2018, external financing requirement for FY2019 was projected at $27bn, rising to $33.8bn by FY2020.

What this means is that projections on external financing requirements, which includes financing the current account deficit, debt amortisation and payments of short-term debt from the previous period, nearly doubled between October 2016 and March 2018 (less than two years). What exactly drove this increase was never explained, nor do I know of anyone who went digging into these numbers.

Suffice it to say that in the latest of these reports, the current account deficit was projected to come in at $15.7bn in FY2018 whereas in reality it came in closer to $19.9bn, so the real figures given in the report to be released in the next few days will be higher still.

The latest projections from the monitoring report of March 2018 projected these requirements rising sharply in the years to come. In FY2023 (three years forward) the projected external financing requirement was shown as $45bn in the March 2018 report. The report to be released in the next few days will be the next snapshot we have on this figure, and if it is considerably higher, we will know that questions need to be asked about the drivers of this increase.

Of course, economic numbers don’t make sense on their own. They either make sense when shown in a series or as a proportion. So the next thing to look at will be what the projections are showing about exports (not that those often pan out), and foreign exchange reserves over the programme period. If that gets too technical for lay readers, it is enough to leave it at this: keep an eye out for this figure (gross external financing needs). If it has risen significantly beyond what the last projections were showing, we’ll know something is up.

Beyond this, the fiscal deficit figures will be important. The government has launched a ferocious budget that seeks a historic increase in revenue collection. If the fiscal deficit targets for the subsequent two years of the programme are similarly fierce, we’ll know the ferocious hunger for revenues is here to stay for a while longer.

Of course, the key in all these programmes is the structural reforms that the government commits to. Those are also the ones they never deliver. So if you’re feeling enthusiastic and earnest, go ahead and peruse what the commitments are regarding the state-owned enterprises, especially in the power sector.

The writer is a member of staff.

Twitter: @khurramhusain

Published in Dawn, July 4th, 2019



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