HERE it comes. The drafters of the IMF statement released on Tuesday have gone to some lengths to dilute the wording, but one conclusion is difficult to miss. The party kicked into motion by the government’s large-scale handing out of goodies to business is about to end. The low interest rates, the slew of facilities for subsidised credit, the subsidies on gas and power, and all the rest of it, are all on the line now as the country moves to get back onto its IMF programme that was suspended back in April when the Covid lockdowns began.
Also on the line is the diminutive growth spurt that these facilities had induced, trumpeted so loudly by the government. The Fund says in the statement that this fiscal year’s growth is likely to come in at 1.5 per cent, the same projection it advanced a month ago. What is at stake is whether or not this very low growth rate will be ramped up in the next fiscal year.
The statement opens by talking about the Covid challenge that it says “temporarily disrupted Pakistan’s progress under the EFF-supported programme”. Before this shock, it says the government’s economic policies “had started to reduce economic imbalances and set the conditions for improving economic performance”. But when the Covid shock hit and the lockdowns began and aggressive social distancing regimes had to be implemented, this trajectory was disrupted and the situation “required a shift in authorities’ priorities”.
The IMF seems to be saying that the incremental quantum of exports cannot justify the scale of “incentives” for the exporter community.
This shift in priorities included a massive fiscal stimulus, trumpeted by the government at Rs1.2 trillion although around a fraction of this amount was actually released, along with some of the sharpest interest rate reductions in decades that saw the policy rate nearly halved within a span of a few months, a slew of financing facilities announced by the State Bank, rescheduling of loan repayments to private banks by businesses, and a ‘construction package’ that involved relaxation of regulatory requirements for builders and a massive amnesty scheme to pump money into the property development sector without asking questions about the source of funds. According to government data, around Rs186 billion entered the property markets as a result of this scheme alone.
Taken together these “incentives” induced a massive rally in the prices of plot files, cement despatches, stock market activity, corporate profitability, and many other indicators of economic activity, providing space for the government to claim all this as the triumph of its economic management. On Sunday, Planning Minister Asad Umar proudly tweeted that all listed companies at the stock exchange have posted an average of 69pc earnings growth for the October to December quarter.
“To a large extent, the authorities’ response was enabled by the fiscal and monetary policy gains attained in the first nine months of FY2020” the Fund statement says. “The external current account improved, due to stronger-than-expected remittances, import compression, and a mild export recovery” the Fund says, pointing out that “sizable emergency financing from the international community” was also used for this purpose.
The inducements given to industry may have produced some results, but they are depleting the buffers in the fiscal and monetary accounts that had taken nine months of a gruelling adjustment under an IMF programme to build, the Fund is trying to point out. Not only that, given the scale of the inducements, the results don’t seem to be particularly impressive, hence the description of the recovery in exports as “mild”, a word not thrown in there casually.
The Fund seems to be saying that the incremental quantum of exports cannot justify the scale of the “incentives” that have been showered upon the exporter community. Now that the country is preparing to get back onto the programme, a question mark has arisen over how many of these inducements can continue, and the Fund statement goes on to talk about this.
The change in strategy that will come once the Fund programme restarts (after the IMF Executive Board has approved the agreement between the government and Fund staff). The fiscal side of the new strategy “allows for higher-than-expected Covid-related and social spending to minimise the short-term impact on growth and the most vulnerable” the statement says, meaning perhaps some of the inducements that were marketed as Covid-related support might be allowed to continue, but many will have to go and there will undoubtedly be a “short-term impact on growth”.
On the fiscal side, the statement says “careful spending management and revenue measures” will be critical “including reforms of corporate taxation to make it fairer and more transparent”. This is the first indication of where things might have to change. The Fund statement singles out corporate taxation as one area where revenue measures will need to be applied. In the power sector, the statement says the government will push for “financial viability” to be attained through a series of steps, including “adjustments in tariffs and subsidies”. The other steps, such as “management improvements” or “cost reductions” are unlikely to bear the brunt of bringing about this “financial viability”.
Most interestingly, the statement notes “a large easing of monetary policy, and a sizeable expansion of refinancing facilities” extended by the State Bank during the Covid months, but quickly goes on to suggest that these are temporary and have to be withdrawn. It’s not clear how much withdrawal there will be, although past experience tells us the Fund is likely to insist on positive real interest rates. The statement does give a hint that the withdrawal of these supports could create serious stress in the system, saying the State Bank will have to “remain vigilant and prevent possible financial stability stress as the temporary support is phased out”.
So the party is about to end, the goodies tray is set to be removed, and the resultant changes could well create debt service difficulties for enough corporates that “financial stability stress” could be created. How far all this will go will be clearer once the detailed agreement is released after Board approval.
The writer is a business and economy journalist.
Published in Dawn, February 18th, 2021