While briefing a select group of economic journalists on the eve of their precipitate departure from Pakistan, the visiting mission chief of the IMF shared frank assessments of Pakistan’s economy. He expressed serious concern over the deteriorating fiscal and external balance of payments situation, weakening of external flows, the SBP’s declining foreign exchange reserves, slowing economic growth, weakening of private sector credit growth, resurgence of double digit inflation and poor export performance.
The IMF also expressed its concern over lack of reforms in important sectors of the economy. The inability of the government to reform the energy sector has emerged as the single largest impediment to higher economic growth and macroeconomic stability. Failure to reform the tax system and tax administration, eliminate untargeted subsidies, reduce borrowing from the banking system to finance fiscal deficit, and restructure or privatise the rotten PSEs are some of the additional areas of concern.
Most importantly, much to the disappointment of the economic team, the IMF has categorically made it clear that neither will its loans be restructured nor payments deferred. This fact is known to all those who have dealt with the IMF and the World Bank. These two institutions are preferred creditors, and as such their debts are neither rescheduled nor their payments deferred.
Additionally, the IMF was also unhappy with the way the SBP has been conducting its monetary policy. In particular, it was dissatisfied with the way the SBP has accommodated large fiscal deficit, injected money to keep commercial banks liquid and facilitated them to invest in government papers. It is for this reason that the IMF foresees inflation picking up by the end of the current fiscal year.
The IMF was also unhappy over the tax amnesty scheme, which the government intends to implement. The amnesty scheme is nothing but a financial NRO. If implemented, this will be a gross injustice done to taxpayers. There is nothing new in the list of concerns expressed by the IMF. They have in fact reiterated what many commentators including myself have sought to highlight over the last five years. Unfortunately, our warnings to the government and its discredited economic team fell on deaf ears.
As to the deteriorating fiscal situation, the IMF has multiple concerns. Firstly, it believes that the revenue collection target of the FBR (Rs2381 billion) is unachievable. I also believe that the FBR is not likely to collect more than Rs2150 billion under the current chaotic political environment. Secondly, allocation made against the power sector subsidy in the budget is unrealistic. My calculations suggest that there will be a slippage in the range of Rs200-Rs250 billion.
Thirdly, reckless spending by the federal and provincial governments to ‘win’ elections could seriously damage the budget. Fourthly, fiscal indiscipline, which is now rooted in the provinces, especially after the new NFC Award, will perpetuate fiscal imbalances and macroeconomic instability. Fifthly, some of the flows (such as sale proceeds of the 3G licenses) to finance budget deficit may not be forthcoming.
Based on the above, the IMF believes that the overall fiscal deficit may hover around 7.0-7.5 percent of GDP as against my estimates of 7.5-8.5 percent (September 25, 2012) and the government’s target of 4.7 percent.
As to the performance of the SBP and its governors, there can be no two opinions that it has been disappointing. Rather than pursuing a prudent monetary policy, they pursued a ‘ballot monetary policy’. While the government and its economic team have systematically destroyed the economy of Pakistan, the SBP has become a partner in crime by relinquishing its responsibilities as a regulatory body.
On the matter of energy bottleneck, the government thus far has been using an electricity tariff hike to resolve the energy problem. The IMF now believes that the electricity tariff hike must be accompanied by comprehensive energy sector reform. This is what I have been stating all along in my columns.
The IMF has given indications that it is ready to sign a three year bailout programme with the Pakistani authorities provided that the reform agenda must have broadest and deepest political support, and that the highest authority as well as provincial governments are fully on board. In my ‘IMF mission in town’ (Jan 15), I questioned the timing of the visit of the IMF team, the kind of commitment they seek from Pakistani authorities, the major political parties, and provinces on the reform agenda.
My view has been that the current economic team has lost its credibility, therefore, any commitment made by the team may not get support of the major political parties. It is, therefore, futile to discuss a programme with this discredited economic team when only a few weeks are left before the end of this government. My suggestion is that in the absence of significant external inflows, let a caretaker government enjoying the support of the major political parties negotiate a programme with the IMF. The caretaker finance minister, being a consensus finance minister will be in a better position to gain support for the programme from major political parties.
The caretaker government will be able to take some critical actions as well. The IMF has also stated in clear terms that it is not averse to negotiating a programme with a caretaker setup, provided there is a strong and broad political support for the programme going beyond the interim setup.
For the IMF, there is no point in talking with the present discredited economic team. It would do better to wait a few weeks for a caretaker setup to be established, and if there is a need for a programme, it will be ideal to talk to a consensus finance minister who will be in a better position to garner support from the major political parties on a broader reform agenda.
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