IMF’s great squeeze
KARACHI: In an expected move on December 14, 2021, the State Bank of Pakistan (SBP), for the second time in less than a month, increased the key policy rate by 100 basis points to dampen the inflationary pressure and support the rupee, but the step proved futile.
The free-fall in the rupee continues to haunt the businesses and masses alike and further volatility in the market would prove detrimental.
Increase in the power and gas tariffs is also making the lives of the people miserable. In the coming days, the government is expected to bring a “mini-budget” in the Parliament, which will put an extra burden on the masses by Rs350 billion in taxes.
All these measures have been taken to meet the tough conditions of the International Monetary Fund (IMF) under the $6 billion Extended Fund Facility.
“Pakistan’s empirical evidence shows the increase in discount rate is inflationary. A one per cent discount rate increases the headline inflation by 1.3 per cent,” Dr Ashfaque Hassan Khan, a renowned economist, said.
He said the SBP itself admitted this fact yet it aggressively increased the key policy rate by a whopping 275 basis points during a short span of time. These measures have been taken on the demand of the IMF. The central bank has revised the schedule of the monetary policy announcement and brought one week in advance to meet the demand ahead of the January 12, 2022 deadline.
The leading economists do not foresee any improvement in Pakistan’s economy in the near future.
“The IMF programme will end in September 2022. The real question is what will happen after that,” Dr Hafeez Pasha, former finance minister, said.
He said the economic situation may not change soon. Things are alarming, as the debt servicing alone requires $12 billion to $13 billion every year. At the same time, there is a trade deficit of almost the same amount. Besides, it is time to pay back loans obtained during the last five years, he added.
“The country has been seeking more loans to pay back old loans and pay interest on these loans,” he added.
The IMF said in its latest statement issued on November 21 that the monetary policy needs to remain focused on curbing inflation, preserving exchange rate flexibility, and strengthening international reserves.
But Pakistan’s businessmen differ with this view and demanded to reverse the hike in the policy rate.
“Free-float exchange rate works as a shock absorber, which discourages imports in a timely manner; thereby, keeping [the] current account in check,” said Abdul Rasheed, chairman, Site Association of Industry.
He demanded reversing the rate to 7 per cent, as industries are already facing severe losses due to gas supply disconnection and a crisis of the magnitude of the Covid-19.
“With the industries facing huge challenges due to closure of gas, one-sided minimum wage notification and an interest rate hike could well prove to be the last nail in the coffin for [the] troubled industrialists.”
“An increase in [the] interest rate of 275 basis points since September would result in higher fiscal deficit by increasing the interest expense by Rs1 trillion on Rs26 trillion domestic debt, while reducing direct taxes due to lower profitability of [the] companies on account of higher interest expense,” he said.
Owing to continuous raise in interest rate at 7 per cent was the main reason that the government of Pakistan to avoid the twin deficits having a better performance on the fiscal front, while the external position remained deteriorating.
The SAI president discarded the idea of keeping real interest rates mildly positive, as most of the countries are maintaining steep negative real interest rates, including the US and the UK. Terming the reversal of the policy rate down to 7 per cent critical for both the private sector and the government, Abdul Rashid said: “It is imperative that [the] SBP reverts its decision of raising the policy rates, as it is detrimental to both the private sector, as well the government without aiding at all in improving the current account position.”
The tight monetary policy stance coupled with other measures, including withdrawal of tax exemptions and power subsidy for the industries on the directives of the IMF is all set to not only make life further miserable for the common man but also hurt the present PTI government.
Along with the tightening of the monetary policy, the SBP is religiously following the IMF directives regarding the free-float of the currency, as a result, the rupee shed 13 per cent since the start of the current fiscal year.
Before coming into power, Prime Minister Imran Khan blamed the IMF loans, as the main hindrance to the economic growth and had repeatedly claimed that he would never approach the IMF.
Prime Minister Imran Khan advocated home grown measures to fix the economy rather than go for the harsh measures to bring the economy back on the right track.
Despite making all-out efforts to avoid IMF by approaching Saudi Arabia, the UAE and China for arranging loans to support the balance of payments position, the captain failed to achieve the desired results.
The economic conditions went so bad due to the ill-conceived policies of the successive governments that Prime Minister Imran Khan has left with no other option but to go for the IMF loan to salvage the country from the financial crisis in 2019.
The long association of Pakistan with the IMF has exposed the country’s fiscal weaknesses. Most of the IMF programmes failed, as the country remained unable to meet its conditions.
Pakistan’s economy also remained unable to pick momentum owing to a host of problems such as corruption, mismanagement and political instability. In most cases, political compromises in meeting the conditions put forth by the IMF resulted in abrupt ending of the loan programme.
At present, the country’s economy is vulnerable to external shocks. The economic indicators are not very favourable to avoid international donor agencies. The accumulation of loans is further aggravating the fiscal situation. The total burden of debt and liabilities increased to 100.3 per cent of the GDP by June 2021, compared with 68.6 per cent of the GDP by June 2011.
The gross public debt has increased to 83.5 per cent of the GDP by June 2021. Meanwhile, the total external debt and liabilities increased to 40.3 per cent of the GDP.
To reduce the debt burden, the tax collection plays a key role but the tax-to-GDP ratio of Pakistan is one of the lowest in the region. The share of federal tax collection in the GDP was 10.9 per cent in FY21, as it remained stagnant during the last six years when it was 10.2 per cent.
In fact, the ratio was increased to 11.7 per cent in the fiscal year 2017/18 but slipped in the later years. In each IMF programme, the Pakistani authorities request for loan through a letter of intent. The authorities show commitment to comply with the fiscal discipline and generate sizeable revenue for returning the amount. These commitments at the later stages become conditions of the IMF.
SBP former governor Dr Ishrat Husain, in an article, pointed out: “It was quite clear from the beginning that this will not be an easy ride and the people of Pakistan will have to suffer pain in the short-term.”
In the latest IMF programme, the letter of intent was signed by Dr Abdul Hafeez Sheikh, the then adviser to the prime minister on finance, revenue and economic affairs and SBP Governor Dr Reza Baqir.
Through the letter of intent dated June 19, 2019, they said: “In support of our economic programme, we request a 39-month extended arrangement under the IMF’s Extended Fund Facility (EFF) in the amount equivalent to SDR4,268 million (equivalent to 210 per cent of Pakistan’s quota, around $6 billion at [the] current exchange rates). The extended arrangement under the EFF will provide needed external financing and signal our commitment to implement sound policies; thereby, bolstering [the] market confidence and catalysing additional financial support from other development and bilateral partners, and private sources.”
They also said: “Evidence of this support are the significant financial commitments already announced by our main official and bilateral donors. We firmly intend to deliver on these decisive reforms to avoid the repeated cycles of instability that have resulted in Pakistan, requesting IMF support recurrently.”
Later on March 9, 2021, the economic managers through another letter of intent for the same programme admitted failure to meet the targets and said: “We missed the end-June 2020 indicative targets, which had been set before the onset of the Covid-19 crisis. These missed targets were due to the necessary fiscal response to the health and humanitarian crisis and also the dramatic deterioration in the macroeconomic conditions in the fourth quarter of FY20. … At the same time, we also missed the target on the ceiling on the stock of government guarantees as some previously excluded guarantees needed to be incorporated into our figures.”
Though the IMF has been criticised for the harsh conditions, there is a role the economic managers have to play, as well, who offer the lending arm to comply with the certain action for getting the loan.
The failure of the authorities resulted in further tough conditions. At present, a heated debate on an expected mini-budget is going on.
Adviser to the Prime Minister on Finance and Revenue Shaukat Tarin is saying that the IMF has advised the government to generate a huge amount of revenue but we have settled the issue with the withdrawal of exemptions and concessions worth Rs350 billion.
The IMF is also under criticism for tightening the monetary policy by the SBP. The IMF in its Q/A posted on its official website regarding Pakistan, said: “The Fund believes that each country’s interest rate policy should reflect its own situation and economic objectives.
In Pakistan’s case, a tightening of monetary policy was necessary to restore confidence in the Pakistani rupee, help rebuild international reserves, and ensure that the domestic financing requirement of the government is met through market placements of government securities.”
The long relation of Pakistan and the IMF and the economic challenges of the country have shown structural problems on the fiscal side. The authorities need to address, considering the domestic demand and supply. Further, to avoid further IMF programmes and ensure repayments, there is a need to stick with the tax reforms agenda to accelerate revenue collection.
Pakistan has never been able to sustain a healthy economic growth since independence, despite entering into the loan programmes offered by the International Monetary Fund (IMF) for the last seven decades.
Surprisingly, the highest-ever growth of over 10 per cent was witnessed in the early ’50s, much before the country entered the IMF loan programmes. For the first time, Pakistan approached the IMF in 1958 and since then the country has received 22 loan packages from the lending arm, including the latest received in the tenure of the present PTI government.
IMF’s great squeeze