An IMF mission is reported to have arrived in Islamabad to evaluate the performance of the government in relation to the quantitative targets and benchmarks for the end of September 2013 agreed between the IMF and the government under the Extended Fund Facility.
These benchmarks and performance criteria are a means to an end and not an end in themselves. The end is to gradually take the economy out of its present economic crisis to a situation of low inflation, high growth and balance of payments sustainability. While preparing their evaluation of the performance of the economy, the IMF and the government will have to go beyond the jugglery of fiscal, monetary and reserve statistics and assess and report real progress towards relative monetary stability, higher rate of economic growth and better balance of payments sustainability.
Even if the performance criteria of the IMF are met on paper but the economy remains caught in the whirlpool of low growth, high inflation and looming balance of payments crisis, then the IMF and the government are engaged in a self-serving and futile exercise. It may help the IMF to recover its outstanding loans from Pakistan and the government may buy some more time to sustain itself politically. But the economy will remain in a critical condition.
Without having access to the latest data that are being prepared by the government and the State Bank of Pakistan to present to the IMF mission, it can be stated with certainty that the data for the first quarter of FY14 would show that the authorities achieved the quantitative targets that had been set for end-September under the IMF programme.
A combination of slow down of the release of development expenditure, shifting to the budget accounts of deposits of those corporations that are not a part of the government as defined in the programme and a substantial reduction in government debt to the SBP at the end of the quarter by borrowing from commercial banks, and some other statistical jugglery, will help produce the quantitative outcome that would be in line with the targets for budget deficit and government borrowing from the SBP set for end September under the IMF programme. There would also be no difficulty in convincing the IMF mission that there was no accumulation of external payment arrears and that indicated floor on targeted cash transfer spending has also been met.
The SBP would work to show that the ceilings on the domestic assets of the SBP and on the SBP’s stock of net foreign currency swaps/forward position have also been observed. However, the SBP may have gone below the floor on its net international reserves. Moreover, its reserves may have been drawn down by more than the monthly limit set under the programme. But those deviations can be justified claiming unforeseen developments and by applying adjusters for inadequate availability of the programme-assumed external inflows. If these statistical tricks were insufficient, the IMF mission will be willing to take the deviations to its Executive Board with recommendations for grant of waivers.
Thus, there should be no doubt that the IMF mission would declare by the end of its visit that the authorities’ performance up to end-September was largely on track and that it will recommend approval of the first quarter performance and release of the next tranche. Such a certificate of good health to the economy will prove helpful to all parties other than the patient.
The real question that needs to be answered is whether or not any progress has been made in reducing the structural imbalances the economy has been inflicted with for a long time. The government and the IMF would serve the country well if they were to explain what is happening in the following areas:
*The economy is in dire need of stabilisation, growth and restoration of confidence in the foreign exchange market. Contrary to what is required, inflation is going up, the foreign exchange market is in turmoil and savings and investment remain miserably low. In what way is a satisfactory performance of the government under the IMF programme helpful in these areas?
*The net domestic assets of the banking system increased at the rate of 2.12 percent in the first quarter of the current fiscal year compared with 1.06 percent in the same period last year. Last year ended up with an expansion of 21 percent in the net domestic assets of the banking system. Given the higher trend in the first quarter of this year what do the IMF mission and the government expect to be the increase in net domestic assets in FY14 as a whole? If it turns out to be more than last year, which was already excessive, in what way would it help promote economic stabilisation and/or a higher rate of economic growth, or impart relative stability in the nominal exchange rate?
*The IMF programme was intended to increase the reserves of the SBP; such a programme usually calms down the markets and reduces speculative pressures on the external sector. The country saw a sharp depreciation of the rupee and depletion of the foreign exchange reserves of the SBP after the approval of the EFF arrangement. It reflected either a lack of confidence in the design of the IMF programme and/or the fear that the government would not implement it in letter and spirit.
Furthermore, the latest balance of payments data show a sharp rise in the current account deficit which is likely to invalidate the assumptions of the IMF programme. With these adverse developments, is there any prospect of changing the design of the programme or taking additional measures to build reserves and bring about stability in the foreign exchange market?
*The country is already in the grip of double digit inflation which is hurting the poor the most. The budget is focused on reducing the price subsidies which were actually subsidies provided to the producers and distributors of utilities to cover their production inefficiencies/high costs and theft and leakages. The increase in utility prices will further increase inflation and hurt the poor.
Why is it that the IMF and the government are willing to put further burden on the poor through reduction in the so-called price subsidies and more reliance on indirect taxes but are not willing to tax the rich and the entire service sector? Is a regressive tax-expenditure system favourable for economic stabilisation or economic growth? Are the poor the most suitable candidates for bearing the burden of adjustment?
*Temporary measures that show a lower budget deficit – like treatment of privatisation proceeds and foreign budgetary support as regular revenue sources –only conceal the structural budgetary problem but do not address them. A large budget deficit will re-emerge soon after these sources dry up. It is not a cure but a bandage to cover up and conceal the disease of structural budget deficit. Under an EFF programme, the IMF is supposed to address structural problems and not rely on patchwork. There is a need for upfront taxation reforms to make the system all-inclusive and less regressive. Why are the IMF and the government unable to see the structural budgetary problems and the need for tax overhaul?
* The IMF will be repaid its outstanding amount in the next two years and the government will be midway through its tenure. The present indications are that this programme will neither reduce structural budget deficit nor improve the vulnerable external debt and payments position. Economic growth cannot pick up without higher rate of savings and investment. Where will the IMF and the government stand vis-à-vis the economy in the coming years if both the budget and the balance of payments become even more vulnerable, inflation remains in double digits and growth rate very low?
The economy continues to be hostage to the vested interest groups that are in control of the government and are living in islands of prosperity while the majority of the people are drowning in a sea of poverty. The IMF programme is only adding to their economic miseries.