The International Monetary Fund (IMF), World Bank Group and Asian Development Bank (ADB) are expected to mount a fresh coordinated effort to help Pakistan implement the stalled IMF programme from July while its specifics are being discussed at the technical level for the next fiscal year.
Apart from the original $6 billion IMF bailout, the support from the two banks is likely to come in two separate assistance pledges totalling $22bn for a five-year period. The stated broad priorities of the lending agencies are: to restore economic stability, improve energy sector performance, strengthen governance. The WB will also focus on the development of water resources.
If dollars start coming at the right time from these three international financial institutions the external sector pressures currently surfacing owing to the current nascent recovery may be contained. In the past too, the foreign capital and financial inflows helped Pakistan shore up the balance of payments position.
‘Without entrepreneurial risk and creative destruction, capitalism does not work — the deadwood never falls from the tree and green shoots are nipped in the bud’
The inflow of dollars and the gradual improvement in the economy will help arrest the price hike, says Imran Khan while holding rupee depreciation as the major reason for the price spiral.
The ADB’s Country Partnership Strategy (CPS) 2021-25 paper notes that a narrow production and export base makes the economy less resilient to adverse shocks which results in balance of payments constraints for growth.
An important issue here is: will the IMF programme be broadly owned for its effective implementation during the second half of PTI’s tenure. As it is, the role assigned to the technocrats in the Cabinet is being increasingly questioned within the PTI’s parliamentary party. The Federal Law Minister Dr Faroogh Naseem is reported to have shown reluctance to approve the IMF-proposed amendment to the Oil and Gas Regulatory Authority ordinance arguing that it would deprive the government of the authority to freeze or partially pass gas price rise to consumers.
Other national major concerns are: will the return of the stalled reforms hurt or spur the nascent recovery? Will the programme help end the boom-bust cycle recurring every 3-4 years?
To quote ADB Country Director for Pakistan Xiaohong Yang the CPS will help to restore economic stability and growth in Pakistan, enhance people’s welfare, create jobs and expand opportunities as the country works to overcome the coronavirus. The strategy has placed a strong focus on combining reforms with physical and social investment to improve sustainability and generate lasting development impact.
Sustaining nascent recovery is imperative. With the pickup in manufacturing activity, tax revenues are rising. The Federal Board of Revenue (FBR) collection in January grew by 12.6pc, higher than the inflation rate, to exceed the target for the first seven months of the current fiscal year. Compared to the same period last year it grew by 6.5pc to Rs2.57trillion.
The fiscal and monetary stimulus for businesses and relief measures for the poor and vulnerable should continue until full economic recovery except for the withdrawal of irrational tax exemptions that benefit rent-seekers. As Ruchir Sharma, chief global strategist at Stanley Morgan Investment Management and a contrarian economic thinker puts it: “without entrepreneurial risk and creative destruction, capitalism does not work... the deadwood never falls from the tree and green shoots are nipped in the bud.”
The proposed agenda of the lenders includes boosting competitiveness and private sector development to create jobs and expand economic opportunities. Currently, the investment-to-GDP ratio is much below its potential.
Stating that Pakistan has expressed its strong commitment to the ongoing IMF Extended Fund Facility programme, the ADB country director said ADB has approved a five-year $10bn indicative lending programme for supporting Pakistan’s efforts to address the social and economic challenges posed by persistent structural weakness thrown up by pandemic.
Pakistan also expects to secure a $12bn loan from the World Bank for five years under a new country partnership programme which may be approved in May.
Perhaps revamping governance, a major bottleneck in economic progress, is the most challenging job. That includes an adjustment in lenders’ own implementation mode. The ADB strategy paper recognises that it needs to step up efforts to improve project readiness and reduce start-up delays, ensure room for flexibilities and course correction during implementation and carefully monitor the country’s programme with respect to policy actions taken under policy-based loans.
Normally, all projects including foreign-funded ones complain of undue delays. A worrying trend now is that the gap between authorised and actual federal development spending is widening. Dr Hafiz Pasha says development spending releases have dropped over 17pc in real terms as of the last week of January as compared to the level in the corresponding period of FY 2019-20.
Sindh is worried about delayed disbursement of committed World Bank loans for ongoing projects as well as pledges for new projects in the pipeline. In a recent meeting, World Bank Country Chief Najy Benhassine has assured Sindh Chief Minister Murad Ali Shah that the stuck funds would be released shortly to complete the projects progress on time. Of the committed $461m for ongoing projects, $193.3m has yet to be disbursed. The meeting discussed 18 projects costing $3.25bn including $1.64bn ongoing and $1.605bn in the pipeline. Shah urged the WB official to expedite formalities so that the new projects could be started from the next financial year.
Pakistan faces a huge productivity challenge. According to the International Labour Organisation estimates, between 2010-2019, output per worker grew at less than 20pc in the country compared to an 86pc increase in China, 68pc in India and 50pc in Bangladesh. It is envisaged to build resilience through human capital development and social protection to enhance productivity and peoples’ wellbeing.
The energy crisis chops off over 2pc of GDP annually and surging circular debts have imposed a prohibitive opportunity cost by pre-empting government spending from critical expenditure on infrastructural and social spending, says an independent economist.
Weak institutions and governance, it is stated, continue to contain investment, limit the economy’s structural transformation and restrict access to quality public services. In fact, both the government as well as corporate governance and institutional functioning need to be updated to build an entrepreneurial and competitive economy.
Published in Dawn, The Business and Finance Weekly, February 8th, 2021