Noor Israr a describes a major economic event
The sigh of relief heaved by new Pakistani economic managers may be rather premature as the IMF programme back on track is visibly firm in asking the Pakistan government to bring its current account deficit under control and this appears to be the overriding concern of the international lender and which is quite difficult to achieve in the present circumstances. In the interim however IMF has agreed in principle to extend the stalled bailout programme by up to one year and increase the loan size to $8 billion, giving markets the much-needed stability and a breathing space to the new government. At this particular juncture it appears that the financial situation on ground may have overtaken the Pak-IMF parleys indicating that far more efforts are required to even-out the current economic downturn. It also reflects that the financial managers of Pakistan are consistently unable to come to grips with the intricacies of a heavily debt-ridden economy that requires a host of out of box solutions and this lack of ability and perception is now proving a major handicap.
For the time being IMF programme back on track has agreed to extend its programme for another nine months to one year subject to completion of codal formalities implying that its cut-out date would accordingly advance ahead of September 2022. The Fund has also agreed in principle to increase the size of loan from the existing $6 billion to $8 billion. Despite signing a 39-month Extended Fund Facility (EFF) with a total value of $6 billion but the programme stalled with $3 billion remaining undisbursed. It is reported that before taking Pakistan’s case to the IMF Board for approval, Pakistan would have to agree on the budget strategy for the next fiscal year 2022-23, and this is the tricky point of the entire issue that would compel the new government to demonstrate that it would undo some wrong steps taken by the former regime against the commitments that it gave to the IMF Board in January this year. Also, the government of Prime Minister Sharif would have to demonstrate that it would undo some wrong steps taken by the former regime against the commitments that it gave to the IMF Board in January this year.
Further exacerbating the situation is the political instability prevalent in Pakistan that has already delayed the decision of IMF in this respect as the present situation in the country are extremely unclear and full of doubts. However, before formally securing the IMF approval for increasing the programme size and the cash limit, the government will have to show that it is sincere in making the needed tough policy decisions. It is therefore reported that the IMF had asked Pakistan to withdraw fuel and electricity subsidies that former premier Imran Khan had announced on 28 February in total disregard for fiscal prudence and to gain the lost support due to double-digit inflation in the country.
In this context it was brought to fore that currently the government is giving Rs.21 per litre subsidy on petrol and Rs.51.54 per litre on high-speed diesel that in the month of April alone would cost the taxpayers Rs.68 billion. IMF insists that the subsidies to overcome this deficit would have to be withdrawn to revive the programme. The former government had estimated the cost of fuel subsidies at Rs.140 billion for 1 March to 30 June this year though up to now the government has already given Rs.101 billion in two months. The concerned circles have estimated that another Rs.192 billion would be needed to pay for the May-June fuel subsidies and this may prove to be very difficult to manage and this precisely was the time bomb placed by Imran Khan for explosion in the future.
Moreover, it was reported that former finance minister had agreed with the IMF that the government would ensure a primary budget surplus to the tune of Rs.25 billion but now it is estimated that there could be a primary deficit of Rs.1.3 trillion by the end of June. In this respect IMF programme back on track wanted Pakistan to minimise the deviation against the earlier agreed limit of Rs.25 billion surplus, the sources said. The IMF also desired that the new government should try to make up for some of the subsidy and deviation. It was also pointed that IMF is also worried about Pakistan’s debt sustainability and is also insisting upon curtailing imports, growing current account deficit and increasing foreign exchange reserves. Many economists point out that the agreement-in-principle will make matters worse for the low-middle-income class as the reversal of the energy price cap and the return of austere economic policies can unleash a new round of inflation and job losses.
It is an undeniable reality that the predominant task of the new government is to keep Pakistan financially liquid and or doing so it has very few options to ensure this aspect. The most problematic issue is to shift the onus of high inflation towards the people that will further reduce their ability to pay that is already very fragile. To begin with the issue that is now faced by the new financial team is related to the fears of sovereign default. The financial managers, however, insist that keeping in view the financial difficulties faced by Pakistan over the last many decades it has never ever defaulted. Though the assurance is timely but the problem is that economic stability is now considered the primary responsibility of the people who will be forced to pay a higher price for achieving this object.
For the time being the new finance minister mentioned that immediately there was no chance of increase in petrol prices but did not rule out the possibility revising prices on or after 1 May, saying that even if the latter route was taken the government will have to deliberate upon various factors before giving the go-ahead. This assertion, however came after the finance minister during his visit to Washington said the government will have to increase the price of petroleum products to get Pakistan’s economy back on track and to revive the stalled bailout programme with the IMF programme back on track. While acknowledging that he does not have a plan as yet but the government will have to review subsidies given to the rich segment in order to ease inflationary pressure on the poor.
The finance minister was clearly evasive about the PMLN policy of reviewing the legislation on SBP autonomy and maintained that there was still much to be reviewed on the matter. He however added that the government had no plans to amend any law at least for a year. The said legislation provides complete autonomy to the central bank and places a complete restriction on the government’s borrowing from it though the government now can borrow at a market rate from commercial banks, which will benefit private banks owned by business elites. The passage of this legislation was one of the conditions set by the IMF for the release of $1 billion to the country. The change of the governor of SBP also appears to be on the cards as Dr. Baqir’s term of office will end of 4 May this year and the name of a former bureaucrat Shahid Mahmood is being considered as his replacement. TW