The COVID-19 crisis has pushed Pakistan into a new danger zone, forcing the lender of last resort, known as international Monetary Fund (IMF), for re-adjusting all macroeconomic numbers massively for the whole loan programme period under 39-month Extended Fund Facility (EFF) for next two and half years. Now there is no other option left for Pakistan and the IMF but to re-negotiate to undertake new number crunching and finalise structural reforms plan, described by some sources in the fund based in Washington DC as “without comprising the principles of direction of the programme”.
The COVID-19 crisis has pushed Pakistan into a new danger zone, forcing the lender of last resort, known as international Monetary Fund (IMF), for re-adjusting all macroeconomic numbers massively for the whole loan programme period under 39-month Extended Fund Facility (EFF) for next two and half years. Now there is no other option left for Pakistan and the IMF but to re-negotiate to undertake new number crunching and finalise structural reforms plan, described by some sources in the fund based in Washington DC as “without comprising the principles of direction of the programme”.
The economy is now passing through a new rollercoaster, where the biggest challenge will be multi-pronged as first of all the government will have to find out fiscal space both at internal as well as on external front of the economy so that the utilisation of funds could be used to spur growth on sustained level, but striking a balance will be a daunting task for the government because if it goes on a spending spree without ensuring fiscal discipline then it would have far-reaching negative impacts on the national economy.
To find a breathing space, Pakistan has undertaken lobbying for getting debt relief on account of suspension of debt servicing for two years. The G20 countries had agreed for suspension of principal and markup amount for one year from May 2020 to May 2021 for 76 countries. Pakistan had already obtained debt rescheduling on its obligation of $12 billion from Paris Club countries in 2002-3 for a period of 20 to 38 years when Islamabad joined US-led war against terror.
There are two major lenders in the fold of G20 that are potential creditors for Pakistan including China and Saudi Arabia. Islamabad had already given commitment to IMF in writing that these two countries would roll over its bilateral debt during the period of fund programme for three years. However, the G20 countries were quite wealthy and possessed influence over the Bretton Woods Institutions (BWIs) such as the IMF and World Bank as so far these lenders were noncommittal over providing any immediate relief but the IMF’s MD assured that the each respective poor country, seeking debt relief, would have to look separately and then take decision. “Of course, there are other countries that are under the burden of debt that don’t fall in this category, and both the World Bank and the IMF are committed to look into debt sustainability issues on a country-by-country basis. See what more can be done to lift up countries’ capabilities to deal with the crisis and to ease that burden” the IMF’s MD stated.
It indicates that each poor country would have to qualify for getting any kind of debt relief from these preferred creditors that were basically not in favour for rescheduling of any of its outstanding debt.
With approval of $1.38 billion under Rapid Finance Instrument (RFI) for Pakistan, the IMF had halted the existing Extended Fund Facility (EFF) as the fund announced for striking staff level agreement on completion of second review with the intention to move forward to its executive board to approve third tranche worth $450 million on April 10, 2020.
Now the IMF slashed down all macroeconomic targets including minus 1.5 percent GDP growth, worsening budget deficit especially primary deficit, escalating debt burden, reducing remittances, exports, and investment. However, the Planning Commission had given its forecast on GDP Growth rate ranging between plus 2 to 2.5 percent for the current fiscal year.
The IMF has massively slashed down the Federal Board of Revenue’s (FBR) annual target and estimated maximum collection of Rs3,908 billion in the post COVID-19 situation against pre COVID-19 estimates of Rs 4803 billion till June 30, 2020. The debt burden, according to IMF, will go up to 90 percent of GDP against pre-COVID-19 estimates of 85 percent by end of the current fiscal year 2019-20.
The FBR has revised downward its tax collection target from Rs5,555 billion to Rs5,238 billion after completion of first review undertaken by the IMF. Later, the FBR’s target was further brought down by more than Rs1,000 billion as the target was further revised downward from Rs5,238 billion to Rs3,908 billion till end June 2020.
On the eve of incomplete second review the IMF agreed to revise FBR target downward to Rs4,803 billion. After eruption of COVID-19, the IMF staff further slashed down the FBR collection target to Rs3,908 billion till end June 2020, slightly over tax collection of Rs3,832 billion in last financial year 2018-19.
The IMF staff has re-adjusted all targets on macroeconomic front over period of next three years in the wake of post COVID-19 and termed it as worst economic situation since 1950.
The IMF staff report also warned about escalating debt burden that would touch 90 percent of GDP by end of ongoing financial year 2020 against pre COVID-19 assessment of 85 percent of GDP. The gross foreign currency reserves will also decrease to $11.9 billion in FY 2020 against pre COVID-19 estimates of $12.5 billion. The gross external financing needs will also be increased and will be standing at $25 billon for FY 2020 and $29 billion next fiscal year 2021.
Public finances, the IMF says, are expected to come under significant pressure. The primary deficit is now expected to deteriorate to 2.9 percent of GDP in FY 2020 (from 0.8 percent expected earlier) over next three years period due to a 1.8 percentage point decline in tax revenue relative to the pre-virus baseline, and the needed higher spending to support the health response, social safety nets for the very poor, and employment.
The shock has given rise to an urgent balance of payments (BoP) need. While the fall in oil prices and weaker import demand provide some support to the current account, the Covid-19 shock will have a severe impact on the BoP. In particular, (i) export growth is likely to come to a halt due to the fall in external demand; (ii) remittances are expected to drop by over $5 billion during FY 2020 and FY 2021 as activity in GCC countries declines; and (iii) outflows from non-resident holdings of domestic treasuries could continue, despite having experienced $2 billion in outflows so far. This scenario will result in new external financing needs of about $2 billion (0.8 percent of GDP; SDR 1,400 million) in Q4 FY 2020.
It is envisaged that these urgent external financing needs will be met through the use of fund credit under the RFI and fresh resources of around $250 million committed by multilateral partners. These disbursements would maintain central bank reserves at $12.0 billion (2.7 months of imports) by end-FY 2020, a level similar to that prior the shock. Moreover, a potential financing gap of around $1.6 billion could emerge in FY 2021, which would be filled through the use of reserve assets, additional support from multilateral partners, and, if needed, additional policy adjustments.
Pakistani authorities have reiterated their commitment to resume the reforms included in the EFF once the crisis abates. These reforms are crucial to boost Pakistan’s growth potential to deliver broad-based benefits for all Pakistanis, especially the most vulnerable segments of the population. Reassuringly, the authorities have reaffirmed their commitment to the EFF and to implement the key policies in the program that will help support growth, build buffers, reduce public debt, and strengthen governance. In this regard, they underscored their commitment to maintain the fiscal consolidation strategy and efforts in energy sector and governance reforms embedded in the EFF.
There is no easy solution available so Ministry of Finance, Economic Affairs Division (EAD) and State Bank of Pakistan (SBP) must assume the leading role in pursuing the objective of debt relief instead of playing the subservient role of any other ministry. Without proper spadework by relevant economic ministries, management of any kind of debt relief from multilateral creditors would not be any easy task at all, so coordinated efforts were required to achieve the desired results.
The writer is a staff member
