Wednesday, May 1, 2019

The mess we made...

The aimlessly drifting ship of Pakistan’s economy that was left at the mercy of wave after wave of crises in the wake of Panama Papers hurricane has worsened to an extent that it can’t be equipped with a rudder without a complete overhaul. Now we are inviting the lender of last resort known as International Monetary Fund (IMF) to treat the ailing economy and the pushy “financial physician”, after diagnosing a myriad of maladies, wants to shove loads of some seriously bitter pills down the throat of the stagnant economy to get it back to its feet and moving again.After delaying reforms through getting generous dole-outs from friendly countries the Pakistan Tehreek-e-Insaf- (PTI) led regime had postponed the required reforms for another year but with or without IMF program the mess that has piled up on economic front will have to be cleaned in the coming months and years under the scrutiny of the IMF.In the aftermath of taking steps on monetary policy, exchange rate, and energy prices, the IMF has decided to dispatch its mission to Islamabad for kick-starting negotiations from this week for making fresh efforts to strike a staff level agreement with Pakistani authorities on a possible bailout package of $6-$8 billion.Earlier, in November 2018, Pakistani team and the IMF mission had failed to evolve consensus after which the latter had to return back to Washington DC without striking any agreement. The upcoming IMF program will be wrapped in toughest fiscal efforts in the wake of widening budget deficit heading towards the highest level in the country’s history in absolute figures. For achieving fiscal consolidation, it cannot be done without full involvement of provinces so how the IMF program will make provinces as part of fiscal consolidation is yet another area on which both, Fund staff and Pakistani authorities, will have to work out a tracking method and then devise a mechanism to ensure implementation and compliance on desired objectives.On revenue collection front, we are left with only two options: either to raise the GST rate from existing 17 percent to 20 percent or raise the customs duty slabs in a major way in the coming budget. Both options will have their own risks attached with them so the policymakers will have to make tough choices. The age of maintain status quo and tinkering with the data for getting satisfactory results is over now and the time of taking tough decision is here. The Value Added Tax (VAT) was also on the old wish list of the IMF and some kind of reforms on GST front will be among the conditions of the upcoming program. The phasing out of income tax exemption regime will be part of the IMF program. The IMF is going to ask for these tough fiscal measures at a time when Pakistan’s GDP growth will have slowed down and inflation have started picking up exactly on the pattern of stagflation. The GDP growth in the outgoing fiscal year is estimated to touch 3.5 to 3.7 percent and average yearly inflation at over 7.5 percent. With nominal growth of 11 to 12 percent, the FBR will be assigned to achieve a collection of 30 percent in the coming financial year against 2 to 3 percent achieved in the outgoing financial year. Prime Minister Imran Khan has held meeting with the IMF’s Managing Director Christine Lagarde on the sidelines of Belt and Road Forum (BRF) in Beijing, which clearly indicates that Pakistan and the Fund had broken stalemate and are moving towards evolving consensus on staff level agreement within next two weeks. If nothing goes wrong, it is expected that the IMF team and Pakistani side will be able to strike consensus on Memorandum of Economic and Financial Policies (MEFP) by crunching out numbers and then evolving agreement on required policy prescriptions under 36 months Extended Fund Facility (EFF).There will be two rounds of parleys as in the first stage the technical level talks will be held for exchanging the data and then reconciling the data on macroeconomic level. After doing number crunching both the sides would reach the stage of starting discussions to develop consensus on macroeconomic framework over next three years period under the IMF-sponsored program.Then second round of discussion mainly covering policy level talks would commence to finalise measures and actions for reaching towards the desired objectives on economic front. In this policy level talk, the financing requirement will be worked out after which the size of the IMF program will be finalised.The possible size of the IMF program will be standing at slightly over $6 billion under EFF program for over a three-year period. On average the country will get $2 billion from the IMF. Pakistan will have to pay back $3 billion to the IMF in next three on account of loans it had obtained under the Pakistan Muslim League-Nawaz (PML-N) led regime.Pakistan’s net financing requirement were estimated at around $8 billion to $10 billion in coming fiscal year 2019-20, leaving the government with no option but to vigorously approach the World Bank, Asian Development Bank (ADB) and international bond market by telling the story of economic revival after getting backing of the IMF program.The discount rate has reached at desired level and the central bank might take some minor steps through monetary policy or exchange rate anchor to suppress demand in gradual manner. However, the major challenge lies on the front of energy sector as the government will have to bring the mountains of circular debt piles down to zero till June 30, 2019 and then come up with a strategy to not to let this monster resurface again during the IMF program period. Another aspect of the circular debt will be erasing of its stocks in a phased manner over the medium term. The World Bank and the ADB will assist the IMF.Dr Khaqan Najeeb, spokesman for the ministry of finance, stated that the IMF team would be in Pakistan from April 29 to continue technical discussions for an IMF-supported program.Najeeb said extensive preparation for data and macroeconomic framework finalisation and structural reforms were ongoing. He added that ministry of finance had held an in-depth discussions with all key stakeholders including State Bank of Pakistan, Power and Gas Division, Privatisation Commission, Federal Board of Revenue and Benazir Income Support Programme (BISP) and others.Despite all the claims from policymakers, it will be one of the toughest programs ever, even if Pakistan and IMF strike an agreement at staff level in next 12 days. So no easy solution is available as we all will have to clean up mess on the economic fronts by ourselves.The writer is a staff member

from The News International - Money Matters http://bit.ly/2IUCuTR

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