Asrar Raouf keeps tabs on economic situation of the country
Economic hurdles prevailing under intense pressure exerted by the IMF and the coalition finally succumbed and raised the fuel price by Rs.30 per liter. It was earlier reported that Pakistan and IMF talks have failed to strike a staff-level agreement mainly because of the government’s inability to withdraw fuel and electricity subsidies. The attitude of the IMF was reflective of the impatience exhibited by the Fund on the procrastination of the coalition government in taking decision though it realised the political uncertainty faced by the new government but insisted on its assertion so that the next phase of the programme begins. IMF probably was disturbed by the fact that its team was kept waiting in Doha and quite obviously it is not accustomed to such treatment. Moreover, it was not sure about the ability of the new government to tackle the crisis and agree to its laid down conditions further complicating the matters.
It is quite obvious that the economic pressures on the new government are extraordinary as it is impressed upon it to pass the cost of fuel to the citizenry but the stalwart politicians heading the coalition government are deeply mindful of the inflaming impact of the increase in the fuel prices. But more importantly it was the IMF that held the purse-strings and it was unwilling to condone the unfunded subsidies provided by the PTI government. In this context, the IMF mission headed by Nathan Porter held both in-person and virtual discussions in Doha with the Pakistani authorities on policies to secure macroeconomic stability and support sustainable growth in Pakistan. The IMF team issued a statement at the end of the parleys specifically pointing out the hurdles that are restraining the Fund to restore the Extended Fund Facility (EFF) citing the deviations from the policies agreed in the last review, partly reflecting the fuel and power subsidies announced by the PTI government in February this year that was termed as laying the economic minefields. The team emphasised the urgency of concrete policy actions, including in the context of removing fuel and energy subsidies and the FY2023 budget, to achieve programme objectives.
It is pertinent to mention here that soon after completion of the sixth review and release of $1bn from the IMF, the PTI government had announced unfunded subsidies in February and then had talks with the IMF for completion of the seventh review. The IMF had raised objections and termed fuel subsidies as unfunded despite claims of the PTI government that it had made provision of funding to provide relief package. This assertion was contested immediately by the new coalition government that publicly announced that there was no provision for financing fuel subsidies. The new government also quickly sent its finance minister to the IMF headquarters in Washington for attending the annual meeting of IMF and World Bank. The Pakistani side requested for revival of the EFF programme and also requested to increase it by $2 billion to $8 billion till June 2023. It must be recollected that the existing IMF programme is going to be completed in September 2022.
However, gradually it came to fore that the new government could not muster up the courage to abolish fuel subsidies, instead it made efforts to convince the IMF on striking a staff-level agreement but failed to convince the fund staff. Many financial experts have showed their concern about the non-completion of the IMF’s seventh review and have termed it to having the potential of seriously disrupting access to other creditors and friendly countries. It was mentioned that the success of an IMF-backed programme hinged on the team’s preparation and the arguments they could present during the review, especially on the needed adjustments on the fiscal side as that was kind of a precondition to put the programme back on the track. It was pointed out that without that matter satisfactorily concluded the Pak-IMF agreement remains unlikely.
It was considered essential that for successful conclusion of the review what was required is better targeting of the petroleum and energy subsidies to reduce quasi and fiscal impact. It is also essential that FBR prepare a good legislation on reform of the personal income tax along with some form of agreement on the steps for implementation of PIT and other measures in the Budget 2023. It was hoped that some progress was made as it entailed a rise in taxes of certain categories due to a reduction in both the number of rates and income tax brackets and reduction tax credits and allowances. A consensus with the IMF is time-bound, as being in the IMF programme requires finalisation of the contours of the Budget 2023 with the fund before presentation in June.
On the other hand economic experts assess that monetary tightening of 1.50% in policy rate has been a helpful move to close the gap with the IMF on the monetary side. It was clearly visible that inflation momentum was also seen to be high at 1.6 per cent month on month and with a hike of 150 basic points in the interest rate at 13.75%, Pakistan’s real interest rate turns marginally positive from being negative in previous months. They also mentioned that IMF’s completion of the seventh review would have removed uncertainty at a time when external financing needs have swelled to nearly $32 billion for FY22 and foreign exchange reserves are eroding, the rupee is losing value and the country’s default risk as measured by five-year credit-default swaps is at the highest since 2013. However, with the steps required to be taken by the authorities, it is likely to take some time to move forward with securing the IMF support required to create economic stability.
The problem confronting the coalition government currently is that it is controlled simultaneously by Islamabad and London. It was therefore quite obvious that the main hurdle was the lack of authority of the coalition government to take decisions. The government did not want to make any major move during this fiscal year while the IMF wanted immediate actions. It was also pointed out that the IMF was not looking at the fuel subsidies in isolation rather it would be a package deal involving decisions on two key issues, first the withdrawal of fuel subsidies and then agreement on the next year’s budget. It was manifest that both the sides could not bridge gaps on the issues of primary budget balance, revenue target, power subsidies’ withdrawal plan, the extent of provincial cash surpluses, the need for any fiscal adjusters and the external financing requirements.
Technically, there was a disagreement on the primary budget balance target for the next fiscal year 2022-23 and the gap was in the range of 1.2% of the GDP of approximately Rs.800 billion. The IMF also demanded firm commitments from the four provincial governments about the cash surpluses that they can generate to achieve primary balance but the deep political divisions in Pakistan was also a hurdle in achieving a consensus on the provincial cash surpluses. The government sought certain fiscal adjusters from the IMF against the primary budget deficit target, which the Fund did not agree to. The delay in release of the IMF tranche has also held back the World Bank, the Asian Development Bank and other bilateral creditors from committing new loans to Pakistan. TW