Pakistan vs. IMF

Spearhead Analysis – 27.03.2019

By Farrukh Karamat
Senior Research Coordinator, Spearhead Research

Pakistan and IMFIn the ongoing saga of Pakistan versus the International Monetary Fund (IMF), the Finance Minister has stated that Pakistan has not wavered from its stance on the ‘main points’ and it is the IMF that has shifted its stance. No mean feat for an economy that was declared to be on a ‘life support system’ when the government took over, not so long ago.

The facts are:

  • The Rupee has continued to lose value and has so far depreciated by close to 34 per cent since December 2017.
  • The CPI inflation (General) crept up to 8.2 per cent in February 2019 vs. 3.8 per cent in February 2018.
  • Core inflation was up 8.8 per cent in February 2019 vs. 5.2 per cent in February 2018.
  • The SBP Key Policy rate is up to 10.25 per cent.
  • Pakistan has contracted US$8.2 Billion in Loans and Deposits from China, UAE and KSA.
  • The Circular debt hovers around Rs.1.4 Trillion.
  • There has been an ongoing hefty hike in the rates for Electricity and Gas consumers.
  • The Regulatory and Federal Excise Duties on imported and locally manufactured goods are up, fueling the inflationary pressure in the economy.
  • Ratings downgrades by Fitch, Moody’s and S&P to Speculative Grade.
  • The State bank of Pakistan’s Q2 report on the economy stated that the country’s gross public debt grew 10 per cent in the first half of FY2019, which included four months of the PTI government.
  • The State Bank of Pakistan has revised the projection for real growth to 3.5 to 4 per cent range due to slowdown in the agricultural sector and the stabilization measures.
  • The Pakistan Stock Exchange continues to flounder.

Actually this is part of what the IMF has been demanding – A rise in tariffs on utilities, depreciation of the Pak Rupee and reform of the taxation system for revenue enhancement. In addition, there has been a demand for a freely floating exchange rate. Pakistan it would appear has met many of those conditions, without admitting that it has acceded to the IMF terms. The ground is pretty much paved now for negotiating the IMF bail-out package.

There will be an ongoing rise in the rates of utilities, the interest rates could be further hiked, and the Rupee could depreciate further. This will fuel further inflation and lead to a decline in the growth rate. The life of the common man is likely to become considerably more difficult in the short-to-medium term with falling disposable incomes and limited employment opportunities in the face of the lower growth rates. There is limited clarity and the conflicting statements on the economy and the bail-out package continue to do more harm than good for the economy. It is essential to present a long-term economic outlook at the earliest to infuse confidence, instead of coming up with ad-hoc changes through ordinances, mini-budgets and hand-outs from ‘friendly’ countries.

Meanwhile the belief is that IMF has come around to our point of view and will lend on terms acceptable to Pakistan. The continued emphasis on an anti-corruption drive focused on ‘nabbing’ rather than ‘reforming’ is driving the parallel economy further underground and drying up the funds that were sustaining the economy. The FBR continues to face revenue shortfalls and the harassment of hapless existing tax payers continues unabated. Under these circumstances the efficacy of another proposed Amnesty scheme remains highly suspect.

The Asia/Pacific Group (APG) on Money Laundering is also evaluating Pakistan’s compliance with global AMLTF standards, with a purported 70 per cent non-compliance. With the FATF already having grey-listed Pakistan any further adverse findings could be detrimental. It is rumored that Pakistan is non-compliant on 28 recommendations out of the total of 40. Out of 40 recommendations, Pakistan is fully compliant with two, largely compliant with three and partially to largely compliant with another three. It is either partially compliant or non-compliant with the rest of the recommendations. The crackdown on dubious transactions is part of the solution, but the real issue is coming up with standards and procedures to ensure compliance with global standards on a sustainable basis.

There is a need to understand that superficial, media-hyped measures will not achieve compliance. Nor will a combative attitude with international financial institutions help the cause. It has to be a collaborative process based on mutual trust and an objective reform agenda. For that it is essential to come out of the crowd-pleasing pre-election mode and focus on the ground realities to bring about real change in the economy. This does not imply bowing to pressure but negotiating on the basis of the on ground situation. The PTI-led government has to demonstrate the will and build up the capacity to deliver on the economic front with lasting changes that will chart the future course of Pakistan.