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IMF’s
SBA package
A year after
implementation of the conditionalities
The economy is
facing a few critical problems, such as reducing fiscal deficit, enhancing
tax revenue collection, ending subsidies and reforming the power and
financial sectors
By M. Sharif
A year has passed since Pakistan signed the
IMF’s SBA (Stand-by Arrangement) package of $7.6 billion on 24 November,
08 that was desperately needed in the backdrop of macroeconomic
instability and looming sovereign default in early 2009. The package was
insufficient because the economy needed an infusion of more than $12
billion, according to government estimates. It had to be coupled with a
number of policy initiatives and hard decisions by the government for
removing structural imbalances, achieving macroeconomic stability and
improving quality of governance.
Warming up to the IMF package occurred due to an
inability to attract substantial inflows from friendly countries and the
lukewarm reaction of the US and European countries to Pakistan’s request
for access to their markets for partially compensating economic losses,
which it had to bear for being the frontline state against the war on
terrorism. This war has so far cost Pakistan no less than $40 billion with
a financial assistance of around $11.0 billion only. With the passage of
time, the war has turned out to be Pakistan’s own war with serious
setbacks to the economy in terms of attracting foreign investment, loss in
productivity level and exports. One year after implementation of the
stringent conditionalities of the package, it seems like it is the right
time to evaluate exactly how much the economy has improved and what would
be its outlook in the next few years.
IMF pointed out high inflation running at 25.3 per
cent from August 2008 and high fiscal deficit that shot up to 7.8 per cent
by end of FY 08. These two damaging macroeconomic indicators needed to be
addressed on priority basis, irrespective of the cost of constraining
economic growth to 2.0 to 3.0 per cent, during the “surgery” period of
two years required to rehabilitate the economy. It had therefore insisted
on increasing the discount rate by 200 bps in November 08 that hiked the
discount rate from 1,300 to 1,500 bps.
The year 2008 had witnessed hike in interest rate by
550 bps. It dismayed domestic private investors and public sector
stakeholders alike, but having no other option; they accepted this hard
reality as a fait accompli.
Furthermore, the government had to agree to link any
decrease in the discount rate in future, with the reduction in inflation
and presumably with an improvement in other macroeconomic indicators also,
such as reduction in fiscal deficit, increase in tax revenue collection
and FX reserves. IMF had a reason for increasing the discount rate, as not
doing so would hardly bring down the inflation level and a persistent high
inflation would be more damaging to the economy than constraining its
growth for a short duration of 2-3 years, exclusively for achieving
macroeconomic stability.
There was an aura of optimism at the time of signing
the package as the government and IMF officials were hopeful of a
substantial improvement in the economy in approximately two years. They
formed certain fiscal and monetary benchmarks, such as reduction in fiscal
deficit to 4.2 per cent and in inflation to 6.6 per cent by end of FY 09.
In addition to this, FX reserves were to be increased from around $6.4
billion to $14.5 billion by the end of 2009. They were hopeful that their
strategy would soon pull the economy out of the terrible state that it was
in and any hardships faced by the people would be short lived. Despite
some of the weaknesses inherent in the package, its success was to depend
on its implementation by the government.
The package’s conditionalities asked for economic
sacrifices from the common man and business community due to the slow
economic growth that Pakistan was facing. It was therefore imperative that
its implementation should have been done in true spirit and the projected
benchmarks should have been achieved within the stipulated timeframe by
observing fiscal discipline at all levels of management. During the past
year, measures pertaining to boosting tax revenue collection, reducing
non-development public expenditure, providing good governance and
improving the performance of public sector entities should have witnessed
a conspicuous improvement. But, it hardly happened up to the desired
level, despite the emphasis made by IMF at the numerous review sessions of
the economy.
Tax revenue collection of Rs1.25 trillion fell short
of the target during last fiscal year and it is unlikely if the target of
Rs1.457 trillion for the current fiscal year would be met. Public sector
entities run on subsidies worth billions of rupees with an unbearable
burden on the fragile economy. Non-development expenditure is being done
extravagantly, showing a lack of concern about resolving the problems
faced by the economy and as a result, by the poor citizens of Pakistan.
Moreover, the country has been ranked as 42nd most corrupt country among
180 nations ranked by the ‘Transparency International Corruptions
Perception Index (CPI)-2009.’ Rampant corruption has led to Pakistan
falling behind by five places from 47th to 42nd position and this has
seriously obstructed the economic recovery, along with rise in poverty and
unemployment levels.
Despite these negative trends, the economy has
witnessed a few positive developments such as increase in FX reserves from
around $6.4 billion a year earlier to $14.228 billion in October 09
billion, which is quite sufficient for five months imports and
up-gradation of national economy’s assessment from junk to B by S &
P and from negative to stable by Moody. The high influx in remittances of
$3.089 billion from July to October 09 has helped in improving the current
account deficit to a slight extent. Inflation had decreased to 8.87 per
cent during October and a further decline in it could enable the SBP to
reduce the discount rate from 1,300 bps. Manufacturing sector has shown
improvement in selective items, for example, there was a 25 per cent
improvement in overall car sales in October 2009 over the previous month
despite the price hike. Upbeat sentiments exist among the people about the
military’s capacity to counter terrorism that is likely to boost
investors’ confidence and create an environment conducive for economic
growth.
However, the economy is still facing a few critical
problems, such as reducing fiscal deficit, enhancing tax revenue
collection, ending subsidies and reforming the power and financial
sectors. During the latest IMF review meeting held in Dubai from 2nd to
12th November, these problems were discussed yet again. An age old problem
of corruption has come to everyone’s attention and has been further
highlighted by AI (Amnesty International). According to its chairman of
Pakistan chapter due to “lack of governance and massive corruption, the
country has lost credibility and is facing serious economic threats,
including poverty, inflation, food and electricity shortages and an
increase in unemployment.” According to him nearly all public and
private organizations have a huge element of corruption bearing an annual
cost of Rs500 billion to the country’s economy. National security
particularly because of combating terrorism is yet another serious crisis
that has a negative impact on the economy in multiple ways. The war
against terrorism has hiked the national defense budget for current fiscal
year by a considerable amount.
Resolving these obstacles requires the government to
take hard decisions related to enhancing tax revenue collection that has
the potential to yield around Rs700 billion annually, according to
chairman FBR, along with tackling other issues like minimizing corruption,
reducing subsidies and fiscal deficit. These decisions have been delayed
or postponed for quite a long time. Consequently, after one year of
implementing the conditionalities of IMF package, it is still not clear as
to where the economy is directed. So far, the economy has been driven on
remittances and foreign loans. Borrowing makes the economy more prone to
risks than ever before. The government had borrowed $8.8 billion during
last year to put life into the economy. Domestic debt has augmented to
Rs4.0 trillion and debt servicing is the highest recurring public
expenditure. The people of Pakistan have been the biggest losers in terms
of economic hardships; unemployment, decline in personal income and high
cost of living.
The time and opportunity to fully benefit from the IMF
package is rapidly passing. The government has to recommit itself to make
the maximum of the time period that remains. It needs to take drastic
steps to solve the many problems it is facing, though; the very first step
to improve the economy should be to reduce corruption. Combating
corruption is the key to Pakistan’s economic growth and development.
This will also help to improve the performance of utilities and reduce
their cost of production. Unless there is a change in the mindset of the
government and they take significant actions to change the dismal economic
scenario, the possibility to make the economy better and free of risks
might be lost altogether and may not be founded again.
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