Deep in choppy waters

17 Feb 2020

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Pakistan and the International Monetary Fund (IMF) are expected over the next fortnight to reach a staff-level agreement on the second review of the $6 billion extended fund facility signed for 39 months in July 2019.

This would enable the executive board of the fund by mid-March to allow disbursement of the next tranche of about $450 million. Technically, Pakistan has delivered on all its end-December 2019 performance criteria and completed structural benchmarks, although revised under the previous review. That means the programme is not in jeopardy, not at least now, despite challenges.

But that is where the fund mission stopped short of announcing a staff-level agreement on the second review, unlike the past. What Pakistan needs to deliver before calling the next meeting of the IMF board in March is to put in place very quickly a strong leadership at the revenue front — whether it is led by an adviser to the prime minister or a chairman or both.

And the new team has to get engaged with the fund staff immediately and satisfy them with a convincing revenue strategy for the future, more importantly, for the next fiscal year as the revenue failure this fiscal year is a foregone conclusion. The hitch here is how to engage the senior-most officer of the revenue service who is set to retire from his government job at the beginning of the next fiscal year. Such adhocism has been one of the root causes of Pakistan’s governance problems and the fund wants clarity with continuity and sustainability.

A strong leadership on the revenue front needs to be put into place, which can satisfy the fund with a convincing strategy as the failure to meet the target is a foregone conclusion

The adherence to performance criteria has been achieved this year with one-off windfalls and accounting tweaking – proceeds from renewal of telecom licenses, 600 per cent increase in the profit of the State Bank of Pakistan owing to the more than 100pc increase in the policy rate, 31pc increase in provincial surpluses, 68pc jump in the petroleum levy, to name a few. For IMF, however, this is not sustainable going forward. Hence a stronger IMF footprint on next year’s budget would have to be ensured when the two sides meet again in May.

Secondly, the authorities have to deliver robust progress on energy pricing provided the current wave of food inflation, particularly the wheat and sugar price hikes, comes under control. The authorities have committed an alternate plan that may enhance the threshold of subsidised electricity to 400 units of domestic consumers from the existing 300 units and keep overall prices unchanged for a longer period, particularly for industrial and agriculture sectors.

The prime minister is now taking a position on energy prices that his adviser on finance warns could fail as it failed for past governments. The toughest part – the burden of higher tariffs – has already been shouldered by the people and now when the time has come for deep-rooted structural reforms the leadership is starting to waver as it fast loses the political capital.

The alternate plan can only come through investments in technology to reduce system losses, theft control, billing recovery and institutional checks and balance. This needs strong leadership commitment and institutional strength. Regular tariff increases can hardly give results when losses range from 16 to 40pc and non-recoveries average 10pc of billing.

Ironically, the power sector receivables have increased by almost 27pc in the last 18 months to Rs1.037 trillion in December this fiscal year while the total circular debt has increased by Rs452bn between September 2018 and December 2019 to Rs1.782tr as per the official account.

Third, the fund wants authorities to speed up progress on privatisation and restructuring of bleeding entities to keep a check on the debt stock that is in dangerous zones and ensure that flows are in control. Monitored particularly by the fund are the liabilities and trade imbalances emanating from the Pakistan-China relationship and certain powerful capitals have been quite vocal on that front.

The last PML-N government also had backtracked from the privatisation of loss-making entities, particularly those in the power distribution network and PIA amid political pressure after successfully passing through the economic stabilisation phase.

Ironically, there is enough literature to suggest that deep-rooted reforms could be successful and sustainable at the political cost of a reformist regime and it is the successor governments that reap the actual fruits.

At the end of the almost two-weeks of talks, the fund mission acknowledged that considerable progress had been made in the last few months in advancing reforms and continuing with sound economic policies.

“All end-December performance criteria were met, and structural benchmarks have been completed”, the staff report said but put on record that “steadfast progress on programme implementation will pave the way for the IMF Executive Board’s consideration of the review”.

The finance ministry’s spokesperson Omar Hameed Khan said the talks were concluded with a complete understanding on all issues and progress in all areas was noted. “The IMF Board in all likelihood will approve the recommendations of the review team”.

The fund said the macroeconomic outlook remained broadly as expected at the time of the first review while economic activity stabilised and remained on the path of gradual recovery.

The current account deficit had declined, helped by the real exchange rate that was now broadly in line with fundamentals, while international reserves continued to rebuild at a pace considerably faster than anticipated, the IMF noted. “Inflation should start to see a declining trend as the pass-through of exchange rate depreciation has been absorbed and the supply-side constraints appear to be temporary”.

Published in Dawn, The Business and Finance Weekly, February 17th, 2020