Completion of the second IMF review

In a remarkable development, the IMF has announced a staff-level agreement for completion of the Second Review under the EFF for Pakistan.

The IMF Mission had earlier left the country without announcing an agreement. It was evident that, despite having comfortably achieved the performance criteria for end-December, going-forward, trends in important variables were not in line with the programme targets.

What has Pakistan finally agreed to in order to reach the agreement? Officials are tight lipped. Normally, both the Fund and the authorities would not divulge the prior actions agreed until the case is placed before the executive board.

The period of hiatus has been sensibly used by the government in expending some serious administrative efforts to arrest the rising inflation and hoping for some divine help in the form of major reduction in oil prices, which were on the horizon for some time. This has definitely eased the despondency that had permeated throughout the economy even though the underlying challenges have persisted.

There was no official word regarding the reason that led to an inconclusive Second Review. But it was widely believed that the prime minister had refused to go for a mini-budget to make up for the shortfall in tax collections and also any further increases in the electricity and gas prices. One would ask what has changed that has enabled the completion of Second Review.

Before we reflect on this question, let us briefly note recent economic developments. On the taxes side, the new numbers for Jul-Feb have no good news as the growth in revenues was recorded at 16.5 percent. Total tax collections amounted to Rs2720 billion. From the original target of Rs5550 billion, this represents only 49 percent. In the next four months with respect to the original target, the FBR needs to collect Rs2830 billion or Rs708 billion per month.

With respect to the revised target of Rs5238 billion, the remaining target would be Rs2518 billion or Rs622 billion per month. Both are hopelessly unachievable. At the present level of growth, tax collections are unlikely to be more than Rs4461 billion, which would be short by Rs1089 billion with respect to original and Rs777 billion from the revised target. Reportedly, the Fund had asked for fresh measures of Rs200 billion, a politically infeasible demand.

It was for this reason that the prime minister sensibly refused to bring a mini budget. A divine help has come in the form of declining international oil prices. This has enabled the government to raise significant revenues by retaining some of the price reductions by increasing the rates of the petroleum levy (PL). Thus the government has avoided the need to take the proposal before the National Assembly in the form of an amending ordinance – although, technically speaking, this still constitutes a fresh tax effort since a budget revenue has been enhanced during mid-year.

Whether this would be enough is not clear. Reportedly, this would give an addition of Rs84 billion PL, taking the current estimate of Rs216 billion to Rs300 billion. How to make the remaining part of Rs200 billion? Some reports have suggested that a GST rate increase from 17 to 18 percent is possibly on the card. That would be politically problematic and therefore it is not clear what other measures would be taken.

The other conditionality is related to increase in utility prices. There is no direct costs on the budget in both cases even though unrecognized costs are there and would lead to further increase in circular debt. The government has a strong argument that, with declining oil prices, the need for such adjustments would lessen.

While it is a welcome development that the Second Review is completed, it must be ensured that the incipient sense of relief is not sacrificed in its wake. The PL has been increased and considerable gain has been recouped by the government. People would not welcome this knowledge. However, saving the programme at this cost may not be a bad trade-off. But despite this relief, it looks like an uphill task to clear the next review with poor FBR performance.

Going forward, such occasions would be returning frequently. We are in the 19th month of the government and the need for imposing costs on the people has not ceased. While it is convenient to shift the blame on others, it would not be helpful for the government to receive people’s approval of its policies. Inflation remains very high, heavily concentrated in food, which particularly hurts the poor and low income groups.

On the other hand, the monetary policy continues to remain focused on concerns of inflation and hence in eight months of this fiscal year the growth in monetary expansion was less than five percent. The credit to the non-government sector was Rs172 billion compared to Rs706 billion last year. Credit to the private sector was only Rs179 billion compared to Rs587 billion last year. Evidently, the cautious expansion of monetary assets is preferred to the need to spur growth in business.

The Ehsaas programme is a social safety net programme and is definitely a mitigating instrument in periods of austerity. But it cannot be the basis for caring for the poor. Only growth and lower inflation will help in this regard. There is now significant space being created on the external side to encourage imports to enable industrial revival. With petroleum and edible oils prices declining, more savings would accrue on the import bill and consequently help the forex build-up. Easing import spending would help industry to grow and create jobs.

The agriculture sector would also benefit as many of its inputs such as pesticides, machinery and implements depend on imports. In the short-run, supply of exports is inelastic. After major devaluation, in the period from Jul 2018 to Jan 2020, exports (fob) are down by $212 million. Accordingly, the key to revive the economy, at least in the short-run, is to focus on easing imports.

The focus of economic policy, therefore, has to shift towards growth, which requires encouraging imports both for industry and agriculture. Growth would give jobs and increased incomes leading to rejuvenation of economic activities.

There are many headwinds we may face as the world embraces for a global slow-down in the wake of fears from the pandemic spread of the coronavirus. In this area, we have to go above the curve rather than struggle with its aftermath.

The writer is a former finance secretary.

Email: waqarmkn@gmail.com