The government has put to rest all misconceptions and ambiguities surrounding its negotiations with the International Monetary Fund (IMF) that started with the arrival of the mission led by Nathan Porter on 31st January, 2023.
The finance minister held a press conference and announced that the government and the IMF had reached an agreement, and the much-awaited Memorandum of Economic and Financial Policies (MEFP) was received early in the morning on 10th February, 2023.
In its official statement before departure, the IMF mission reported the conclusion of its talks with the government citing commitments from the prime minister of Pakistan. The news had already sunk into the markets, and the dollar had retreated around 6 rupees against the rupee in intraday trading on 9th February.
While there were many rumours about the IMF being tough and the negotiations coming to a deadlock, even after many verbal assurances by the government, the IMF did not make the programme conditional on requirements that were not part of the previous fund facilities or standby arrangements.
The reform requirements that the IMF presented to the government are identical to what it has presented to Pakistan and other nations in the past, and one can safely contend that what happened during the mission’s stay in Pakistan and the economic circumstances that will emerge in the follow-up to the mission will not be any different to the status-quo.
The first reform proposal that IMF makes is to mobilise revenues by increasing the tax-to-GDP ratio, which at 10.8 per cent is one of the lowest in the region. Around three million people out of a population of 220m are active taxpayers and roughly 60pc of the government’s total tax revenue is spent only on paying interest against debt.
IMF’s first proposal was to mobilise revenues and ensure the country met its tax collection targets. Tax revenues have grown, but like growth in exports, it’s difficult to identify growth after isolating volumetric increases from the inflationary impacts. The government has promised to raise an additional Rs170 billion through general sales tax, which will not be levied on petroleum products that are the subject of a separate IMF reform proposal.
The second proposal is to bring untargeted subsidies in the gas and power sectors to zero. That implies that government charges consumers the cost that it incurs to produce and deliver power and gas. The debate was to minimise the burden on lifeline consumers and keep prices constant for the lowest power and gas-consuming slabs.
IMF insisted that prices should be increased across the board and any subsidy that will be paid should be targeted. IMF believes that the government should remove subsidies on electricity and gas bills while compensating the poor through cash transfers under the Benazir Income Support Programme which is a more direct and targeted way of reaching those most affected by price hikes.
However, the government resisted and convinced the IMF to increase the electricity and gas tariffs while protecting certain low-slab lifeline consumers. It also decided to increase the diesel levy from Rs40 to Rs50, as it was agreed earlier with the Fund. Petrol subsidies have already reached that level.
The third proposal the IMF continues to make is regarding Pakistan’s mounting circular debt. This is probably one area where the conversation this time was slightly different from the past.
In the past, the IMF was more focused on reducing the stock of circular debt, which is debt that is already accrued and accumulated. However, given the shrinkage of the fiscal space and Pakistan’s macroeconomic and external account worries that have increased enormously over the last 12 months, IMF was more focused on the flow of the circular debt and not the stock. Reportedly, around Rs500bn have been earmarked to stem the flow of circular debt, which will prevent further erosion of the fiscal space.
There was a discussion on the primary budget deficit/surplus, which is estimated as the total income that is left after deducting expenditures other than interest. While the oft-cited nine tables that formed the basis of the discussions between the government and the IMF were not released to the media, it has been learnt that the IMF provided an unrealistic primary budget surplus/deficit target which the government thought was difficult to achieve, under the prevailing economic circumstances. Primary surpluses have also been a metric of great interest to the IMF and the basis of discussion on the fiscal side.
The economic situation will continue to remain uncertain in the near term, but some sanity will return to the markets and business will resume and attain normalcy as soon as the tranche from the Fund is received.
The staff-level agreement will be reached soon after the mission returns and is able to resume virtual conversations with the government. However, it is likely that Pakistan will be negotiating another review with the IMF with terms that, contrary to what analysts propose, will not be very different to these.
The writer is an economist based in Islamabad.
He tweets @asadaijaz
Published in Dawn, The Business and Finance Weekly, February 13th, 2023