The economic team led by Finance Minister Ishaq Dar was granted two waivers during the mandated eighth quarterly review held in Dubai under the 6.64 billion dollar Extended Fund Facility. The waivers were for missing the (i) agreed deficit target of 4.9 percent by 0.4 percent and (ii) the 1865 billion rupee ceiling target on net borrowing from the State Bank of Pakistan (SBP) by end-June 2015.
Not surprisingly, was the acknowledgement in the International Monetary Fund (IMF) press release that “all end-June programme targets related to monetary policy were met, in some cases with a significant margin.” A central bank is the engineer and implementer of monetary policy with the overriding objective of controlling inflation mainly through adjusting money supply as well as ensuring trust in the currency locally and abroad.
The SBP has a history of meeting IMF conditions that may well indicate its support for IMF prescriptions and perhaps reflects a more rigorous negotiation strategy in marked contrast to the Ministry of Finance that has been engaged in agreeing to policy reforms that it is simply unable to implement politically. This contention is manifest in the government’s failure to implement agreed tax and power sector reforms as well as usher governance reforms.
Failure to meet the net borrowing target from the SBP is widely viewed as a consequence of pressure on the SBP by the Ministry of Finance to release the funds for budgetary support.
The Finance Minister’s commitment during the press conference in Dubai on completion of the eighth review, that the government would ensure the passage of the bill granting SBP autonomy from parliament is seen to reflect IMF concerns that the government is dragging its feet with respect to meeting this agreed structural benchmark.
Critics of the incumbent Finance Minister argue that he is unlikely to grant autonomy in spirit even if he does, albeit reluctantly, in letter. Be that as it may, borrowing from the central bank is a highly inflationary policy whose negative impact on the rate of inflation have been minimal in recent months in the face of falling international oil prices and a rise in remittance inflows into Pakistan.
If these two factors cease to be relevant in the coming months, inflation would again spike in the event that borrowing from SBP continues.
What is additionally a source of concern for the Fund is what has been termed over-valuation of the rupee, a move reportedly supported by the Ministry of Finance, which allows it to show lower external indebtedness in its budget documents with a consequent positive impact on the deficit.
Unfortunately though, an over-valued rupee is increasingly being cited as an impediment to the exporters’ ability to compete internationally. And the catch-22 is that an over-valued currency through its negative impact on exports would eventually lead to rising indebtedness because of a fall in export earnings and loss of export markets.
The budget deficit target was missed by 0.4 percent. Independent economists claim that the deficit is understated due to outright data manipulation of key macroeconomic indicators. However, what is important at present is that the IMF is sufficiently convinced that the government is embarked on the agreed reform programme, albeit with some delays including with respect to the privatisation programme, power sector and tax reforms.
The Fund urged accelerating of efforts to widen the tax net to create space for infrastructure investment and social assistance before it agreed to recommend to its board of directors to approve the release of the next tranche. The Fund’s press release notes that “real GDP growth is expected to increase to 4.5 percent this fiscal year, helped by macroeconomic stability, low oil prices, planned improvements in the domestic energy supply, and investment related to the China-Pakistan Economic Corridor”.
Without the CPEC, low oil prices or further delays in energy supply improvements the projected GDP is unlikely to be met.
The government in turn, committed to supporting the poor and most vulnerable through increasing the number of beneficiaries under the Benazir Income Support Programme, placing the energy sector reform on priority agenda, launching one-stop shop (physical and virtual) to improve ease of doing business and broadening the tax base by enhancing use of IT and information inflow from multiple sources.
One can only hope that these commitments are vigorously implemented and the government does not back down under political pressure.