Growth amidst consolidation

04 Nov 2019


Policy-level discussions bet­ween the visiting staff mission of the International Monetary Fund (IMF) and Pakistan’s economic managers on the first quarterly review of the 39-month loan programme are yet to formally begin.

The two sides have, however, already floated some fresh ideas to move forward on the $6 billion Extended Fund Facility (EFF) while minimising the collateral damage of the ambitious economic policy stance that is causing a contraction across the national economy. The review will be over by Nov 7.

With a reduction in the current account deficit mostly through imports, the domestic industry has slowed down and agricultural indicators — cotton and sugar cane production — are not promising. The consumption of petroleum products is declining after many years, apparently another key sign of slower economic activities. Savings in the import bill may have caused more harm than benefit.

Inflation is already taking a toll on the middle class. A high policy rate and taxation measures have hurt private businesses. The IMF itself is projecting core inflation of 12.4 per cent, general inflation of 13pc and a fiscal deficit of 7.4pc for the current fiscal year.

It has also estimated higher debt levels despite better revenues in 2019-20. There are handicaps within the policy direction. The monstrous circular debt in the energy sector hampers financing required to improve cash flows. Yet there is a firm cap on sovereign guarantees that the government can issue to launch funding papers — a chicken-and-egg dilemma.

The IMF is encouraging the government to make full use of development budgets across all layers of the federation as stimulus to economic growth

The authorities are now feeling the heat of their agreement with the fund to link purely economic policy matters with geo-political complexities in their rush to secure a bailout only a few months ago.

Interestingly, it is now the IMF encouraging the government to make full use of development budgets across all layers of the federation as stimulus to economic growth and achieve development goals. In fact, the government has already expedited disbursements for the current year’s development programme.

In the first four months of 2019-20, Rs257bn has been authorised for release at the federal level for the Public Sector Development Programme (PSDP). This accounts for 37pc of the annual allocation of Rs701bn. This is significant when compared with less than 16pc a year ago when Rs106bn was released against an allocation of Rs675bn.

The authorities, during their interactions with the IMF’s high-ups, have already sought relaxations to help raise $3bn from the international capital market and Rs200bn from domestic commercial banks within the current fiscal year starting with the current quarter. Pakistan wants one of the two bonds — sukuk or euro bond — before the end of December and the rest of the budgeted $3bn before June 2020. The global capital market is currently favourable in terms of low returns available to investors.

Therefore, the Fund has been requested to separate its programme from the conditions relating to the Financial Action Task Force (FATF). Its scope is too wide and is being used as an instrument for achieving geo-political and regional objectives by Pakistan’s adversaries.

The problem stems from the fact that an IMF structural benchmark required Pakistan to “adopt measures to strengthen the effectiveness of AML/CFT (anti-money laundering and combating the financing of terrorism) framework to support the country’s efforts to exit the FATF list of jurisdictions with serious deficiencies” by the end of October.

The deadline has elapsed. Pakistan is now required to submit a fresh compliance report to the Paris-based financial watchdog by the end of December. It will be subject to another review by February 2020 to move out of the grey list or be placed in the blacklist with serious consequences.

Likewise, one of the six performance criteria under the IMF programme for Pakistan is to have a “ceiling on the amount of government guarantees” to the extent of Rs1.6 trillion throughout the current year i.e. until the end of June 2020. The authorities now want this limit removed at the earliest to ensure funding from domestic Islamic banks, which was already finalised but has been blocked by the Rs1.6tr ceiling on government guarantees.

The IMF now looks forward to a further increase in power tariffs to the extent of 10pc in two phases — in January and March next year. The regulator has been advised at the top level to do the needful.

In an interaction with the chief ministers and the premier’s adviser on finance Dr Abdul Hafeez Shaikh, the IMF called for harmonising the tax system and creating a single tax base because it had a direct impact on the ease of doing business. This will go a long way in creating an enabling business environment and boosting confidence of investors and businessmen, the IMF has argued.

IMF Mission Chief to Pakistan Ramirez Ernesto Rigo believed Pakistan had a continental-size economy, much like Western Europe where everybody had the same definition of the tax rate and services — something that could be replicated in Pakistan through uniform tax rates and a single tax administration instead of two or three tax authorities at federal and provincial levels.

Published in Dawn, The Business and Finance Weekly, November 4th, 2019