The Pakistan Tehreek-e-Insaf (PTI) government is heading towards deferment of the International Monetary Fund (IMF) sponsored programme of $6 billion under the Extended Fund Facility (EFF) by putting it on hold for as long as possible. This raises the question as to how the Fund programme would be revived after this short pause.
The government is standing at a crossroads and seems conflicted on taking a decision to whether use dillydallying to gain time using the excuse of Covid-19 or coming forward to pursue the much needed structural reforms to revive the IMF programme and move from recessionary phase towards growth.
This approach of ‘deferment’ or putting things on hold can be explained through some recent steps undertaken by the government as the Economic Coordination Committee (ECC) approved tariff hike of Rs2.89/unit for K-Electric, while in its summary stating that this tariff would not be applicable for three months. It clearly indicates that the IMF programme is not going to be revived till September 2020. The IMF also wants paradigm shift in the allocation of subsidies for the power sector, but there is no movement on this front either.
The government has adopted a strategy to keep the IMF programme on hold in the guise of the Covid-19 pandemic; however, the macroeconomic fundamentals show that the country is heading towards the adoption of a business as usual approach where no political will is visible for undertaking any reforms on administrative or legislative sides for an indefinite period.
The IMF’s projections on GDP growth must have rung alarm bells among the dwellers of Q Block (Finance Ministry), from where the real GDP growth was projected at positive one percent for the current fiscal year 2020-21 against government’s envisaged target of 2.1 percent. The IMF has predicted India’s growth at six percent and Bangladesh growth at 5.7 percent post Covid-19 for the current fiscal year.
The IMF’s growth projection in case of Pakistan clearly demonstrated that there was no possibility of economic revival in the current fiscal year. With such low growth, it shows that the economic activities will continue to halt. In such a scenario, it is beyond imagination how the FBR will be able to achieve Rs4,963 billion target by clinching around 24 percent growth compared to the last fiscal year.
For reviving the IMF programme, the government and Fund staff would have to strike staff level agreement on all envisaged targets and timelines for implementing structural reforms.
With reduction in the current account deficit (CAD), Pakistan’s economy can survive without the IMF programme, but the possibility of fixing structural and long awaited bottlenecks would continue haunting the economic horizon of the country for a longer period. These longstanding problems would remain unsolved. So a business as usual approach would take the driving seat.
There is another path where the government must come up with a comprehensive plan to revive the stalled IMF programme without wasting any time.
After smooth approval of the budget for 2020-21 from the Parliament, the IMF sponsored programme of $6 billion could only be revived if Islamabad moves ahead to comply with tariff adjustments on electricity and gas, as well as undertaking the much desired reforms to evolve staff level agreement on completion of the second review. The IMF programme has been put on the backburner and both sides are currently discussing different options to revive the stalled programme.
There are still some pending issues such as tariff adjustments of electricity and gas as well as strengthening regulatory regime, autonomy to the State Bank of Pakistan, fiscal consolidation and way forward for achieving GDP growth on sustained basis, said one top official of the Finance Division.
The IMF side argued that they provided Rapid Financing Facility (RFI) soon after the outbreak of Covid-19 to help Islamabad readjust its macroeconomic targets. Now Islamabad will have to perform and come up with a viable strategy to revive the IMF programme.
There are different possibilities under consideration, as one option is to skip the third review of the IMF programme. Another is to club the second and fourth reviews under the IMF program. The second review period was end December 2019 for which the IMF team had visited Islamabad in February 2020 just ahead of the Covid-19 outbreak, and finally staff level agreement had also been reached. But after the new coronavirus outbreak, all economic fundamentals changed and the IMF provided $1.4 billion facility under RFI.
The third review period was January to March 2020. The fourth review period was April-June 2020. Pakistani authorities made last ditch efforts to convince the IMF for clubbing the second and third reviews, and submitted it before the Fund’s Executive Board within this ongoing month. “It seems that the IMF so far is unwilling to club the second and third reviews without undertaking tariff adjustments and moving towards structural reforms for cash bleeding power sector, autonomy to the central bank, strengthening of regulatory regimes and fiscal consolidations at sustainable levels,” said the official sources.
The IMF mission physically or virtually would initiate talks for completion of fourth review by next month (August) when the data of all macroeconomic fronts for end June 2020 would be available for completion of review. The IMF programme could be revived probably in September 2020 when its Board will meet for approving second and fourth reviews simultaneously, provided Islamabad takes all required measures in accordance with the IMF programme, said the official.
Pakistani authorities are confident that the IMF programme would be revived as they presented a budget for 2020-21 that complies with the IMF requirements. The budget deficit was curtailed at 7.1 percent and the primary deficit was slashed to negative 0.55 percent of GDP.
The non-development expenditure such as salaries and pensions were frozen in the budget. The oil prices were increased exponentially by charging maximum levy at rate of Rs30 per litre. All these steps, they argued, were aimed at reviving the stalled IMF programme. But there is still gap between the cup and the lips.
The ball is in the court of the PTI-led regime as the regime will have to decide whether it can run the economy with or without the IMF programme. If it wants to revive the IMF programme, it will have to come up with short- to medium-term strategies, otherwise the status quo on economic front will continue to persist for months and years ahead.