In the run-up to the final round of negotiations with the International Monetary Fund (IMF) for the revival of the $6 billion extended fund facility suspended since April this year, the government moved quickly to announce another increase in average electricity tariff that has seen almost a cumulative 70 per cent rise (from Rs10.50 per unit in June 2018 to Rs17.84 per unit to be in November) since the PTI government came to power in 2018.

A fresh Rs1.39 per unit hike in price is expected to generate Rs140bn additional funds to power companies or reduce subsidies in addition to about Rs25bn in additional revenue to the Federal Board of Revenue. While the finance adviser Shaukat Tarin appeared positive on the conclusion of his interactions with the IMF and the World Bank authorities in Washington, he said the IMF wanted to revalidate data provided by the authorities on revenue collection that showed Rs175bn higher than the target.

He expected a joint statement with the IMF this week on completion of the sixth review and resultant disbursement of about $1bn and his re-election as finance minister through a yet to be vacated Senate seat from Khyber Pakhtunkhwa.

To materialise the deal, he directed the secretary finance to stay put in Washington DC to coordinate with IMF authorities while they revalidated Pakistan’s data before reaching a formal agreement. In the meanwhile, he would also be in New York if further policy discussion was required. He has restrained himself from disclosing the revised conditions for the programme to continue but has tried to send positive signals to the market and that would need to be watched against real action on the ground including tightening of the monetary policy going forward.

PTI’s journey to control the current account deficit through the exchange rate, interest rates, hike in duties, taxes and energy rates that jammed economic growth appears to be moving in the opposite direction as far as results are concerned

The delayed decision making instead of upfront clarity of direction for structural economic reforms continues to haunt the government that is now well into the fourth year of its tenure and getting closer to the election cycle by the day. Its challenges continue to unfold including both exogenous and endogenous.

It already has had four finance ministers, seven FBR chairmen, seven ministers or advisers in the energy ministry and five finance secretaries in three years. That alone explains a large part of the policy direction. The outcomes are thus unpredictable for the people and the national economy and uncertain about the political future of the ruling party and its supporters.

The journey that the PTI government started after coming to power to control the current account deficit through the exchange rate, interest rates and hike in duties and taxes and energy rates that jammed economic growth appear moving in the opposite direction as far as results are concerned. Imports are rising much faster than exports as economic activities started to turn positive after a year of negative growth. Led by record food prices, the inflation rate had been a permanent challenge all these three years.

As the international energy prices head north, the government had finally decided to put a moratorium on new gas connections including those it had itself allocated funds out of the public sector development programme. There is always a limit to burning expensive imported energy to be flown with cheap local output into highly leaking gas pipelines. It was simply against any business logic to expand the pipeline network for which molecules are not available to flow just because such dead assets promise a return to the gas companies instead of earning a profit on the sale of gas.

But the solution being pushed through the weighted average cost of local and imported gas would be replacing a bad with worse. This will diminish any chances of competition in the market in terms of energy sales. How could a private party bringing an imported commodity compete with a public entity that has an inherent advantage through a basket price of local and imported products?

It is broadly owing to these mixed signals that various international agencies have divergent views about Pakistan’s economic outlook as policymakers also appear concerned about the overheating of the economy, much faster than ever anticipated. Both finance adviser Shaukat Tarin and governor central bank Dr Reza Baqir have set directions to put breaks to imports.

In fact, Mr Tarin has estimated the economic growth going beyond 5.5pc during the current fiscal year but has warned that such quick spurts need to be monitored because these were unsustainable.

As he was engaged with Fund authorities over policy level talks, the IMF forecast Pakistan GDP to grow at the rate of 4pc, average inflation at 8.5pc, current account deficit above 3pc of GDP and unemployment rate at 4.8pc during the current fiscal year.

This growth rate is exactly the same as projected by the Asian Development Bank (ADB) about two weeks back but significantly higher than 3.4pc projected by the World Bank a few days ago and rejected by the government as unrealistic. Fitch Solutions had projected Pakistan growth rate at 4.2pc but significantly lower than Pakistan budget target of 4.8pc. The State Bank of Pakistan anticipates GDP growth to stay toward the upper end of the forecast range of 4-5pc.

Going forward, the IMF projected economic growth rate recovering slowly to 5pc of GDP in about four years by 2025-26.

It said the rate of inflation would slide to 8.5pc this year against 8.9pc last fiscal year but would rise again to 9.2pc by end of this year. The Fund expected the consumer price index to slowly come down to 6.5pc by 2025-26. The Fund estimated the current account deficit rising from 0.6pc of GDP in 2020-21 to 3.1pc next year (2021-22) and then reducing to 2.8pc of GDP by 2026.

On the financial side, however, the IMF has estimated Pakistan’s major fiscal indicators to gradually improve this year and beyond until 2026. It estimated the government’s overall fiscal deficit at 6.2pc of GDP, primary deficit at 0.4pc of GDP and debt levels at about 81pc of GDP during the current fiscal year.

This shows improvement over the last fiscal year when the fiscal deficit stood at 7.1pc of GDP, primary deficit at 1.4pc of GDP and general government debt at 83.4pc. The fund projected that all key fiscal benchmarks would maintain an improving trend over the next five years, showing an overall better fiscal position.

The IMF has estimated the fiscal deficit for next year (2022-23) declining further to 4.2pc of GDP and going further down to 3.2pc of GDP by 2026.

The IMF forecast Pakistan’s general government gross debt coming down to 80.9pc of GDP during the current year from the highest peak of 87.6pc of GDP in 2019-20 followed by 83.4pc of GDP last year, mainly because of an increase in the size of the GDP. It projected the gross general government debt to reduce to 75.8pc next year (2022-23) and scaling down gradually to 63.6pc of GDP by 2026.

The net debt to GDP ratio — after adjusting for repayments etc — was also estimated to come down to 74.8pc of GDP this year after hitting a record 80pc of GDP last year. It is estimated to maintain a declining trend over the next five years to reach 59.4pc of GDP by 2026. Likewise, it projected the primary account turning positive 1.3pc of GDP in 2022-23 from a primary deficit of 0.4pc during the current year. The primary surplus would remain 1.3pc for the next two years and slightly increase to 1.4pc of GDP in 2025 and 2026.

The Fund has estimated Pakistan’s revenue-to-GDP ratio improving to 15.4pc of GDP during the current year against 14.5pc last year. It projected the revenue to GDP ratio to improve to 16.6pc of GDP in four years. On the other hand, the expenditure-to-GDP ratio is also projected to remain unchanged at 21.6pc of GDP during the current year as it stood last year but would keep declining from 20.8pc of GDP over the following two years and gradually climb down to 19.9pc of GDP by 2026.

Published in Dawn, The Business and Finance Weekly, October 18th, 2021

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