ARTICLE (September 08 2008): Analysts are unanimous in their assessment that Pakistan will have to go on the IMF sponsored programme unless drastic remedial measures are undertaken immediately - a programme marked by harsh conditions likely to quickly erode the popularity of an elected government.
PPP, at this point in time, can ill afford to alienate large parts of the populace because even though it is the largest party in the National Assembly, it does not command an overall majority.
The question is what is the basis of this assessment made by economic analysts? Is it a set of macroeconomic indicators that appear to be worsening with the passage of time? Is it reluctance on the part of the government to change the expenditure priorities as was amply evident in the budget for fiscal year 2008-09? Or is it due to concerns revolving around total revenue, with the present government's budget lacking clarity as to how it would meet the rather ambitious revenue targets it has set?
There is general unanimity that it's all of the above. Macro economic indicators have reached alarming levels. The foreign exchange reserves have plummeted to under 7 billion dollars, the rupee is in a free fall and periodic State Bank intervention to shore up its value appears to be too little and too late.
The State Bank would no doubt lay the blame on the federal government because of its failure to arrest the budget deficit and its continued reliance on borrowing from the State Bank as well as hectic lobbying in foreign capitals to import oil and food items on deferred payments as the solution to its resource constraints. To date only wheat imports will be forthcoming on deferred payment and no agreements have yet been inked with reference to our hefty oil bill.
Government sources have recently indicated, though, that no payment has been made to Saudi Arabia for oil imports for the past few months and there are indications from that country that eventually they would grant us the oil facility; if this is true and the government has yet to make payment for the oil it has imported in recent months then the current foreign exchange reserve position is even more worrisome.
More recently the government has indicated that it would withdraw subsidies further, expected to have a major negative impact on its popularity ratings, and commence privatisation as a means to generate revenue and contain the budget deficit. According to the IMF Director of Middle East and Central Asia Department, Pakistan needs substantial external financing to stabilise the economy. If these efforts on the part of the government bear fruit then perhaps the need for IMF assistance may not arise.
To add salt to the festering wound that is our economy is the fact that the sentiments in our markets are particularly grim at this time. The stock market is in turmoil, the local investors are hesitant to plow back profits into expanding their business and the public is suffering from a rate of inflation that disallows it from spending on too many goods outside what is considered kitchen items.
Thus with demand curtailed which would automatically reduce productivity and inflationary pressures are on the rise, it is a foregone conclusion that the growth rate would be considerably less than the one last year. It is relevant to note that as the growth rate declines, a negative multiplier comes into effect which would have a proportionately larger impact on the national income. In other words, there are dire forecasts about the GDP growth rate which, in turn, would impact on unemployment as well as the tax revenue.
As if this were not all, the energy shortfall has reached alarming proportions and while the public would understand if told that the problem lies with small generation capacity relative to demand, yet recent reports point to a much more disturbing picture: that of rising circular debt and how one government agency is unable to pay another resulting in the inability of the generation plants to make payment for purchasing their basic input, say, furnace oil. So far this problem does not seem to have been resolved as load shedding has gone up to unprecedented levels.
And then there is of course the problem of inadequate resources. Until and unless the government can dramatically raise its capacity to generate revenue and at the same time curtail its burgeoning expenditure, it will be difficult to enable the conclusion that the IMF programme is not a foregone conclusion, a programme that is expected to be even harsher on the general public than the periodic upgrade in utility rates and oil and food prices. As of 4 September 2008 the IMF, during a press conference, stated categorically that "the (Pakistan) authorities have not requested a Fund programme."
The last IMF Article IV Executive Board Consultation for Pakistan was on December 17, 2007. In a Press conference in July 2008, the IMF stated for the record: "One of the important issues in Pakistan is that net international reserves have declined by about 6.5 billion US dollars since the end of June, 2007 to about 7.7 US billion, and the Pakistan rupee has depreciated by 20 percent against the US dollar over the same period. Now a significant tightening of both fiscal and monetary policies to contain inflation and reduce the external current account deficit is needed in our view.
In particular, fiscal consolidation should include the phasing out of energy subsidies, and moreover there is a need to stop central bank financing of the government which has been large since October, 2007. The Minister of Finance, I would note, has announced that, in principle, Saudi Arabia has agreed to provide an oil facility, deferring payment of part of Pakistan 's oil import bill. But the terms, I understand, are still under discussion."
A look at what is happening in Pakistan clearly reveals that the government is following IMF advice almost to a T: energy subsidies are fast disappearing, monetary policy is being tightened and there are statements from the government that more reliance will be placed on borrowing from the National Savings Centre rather than from the SBP. And what the government is relying on, the decline in the international oil prices, would it is being fervently hoped in the PPP high command would automatically strengthen the foreign exchange reserves position.
So will Pakistan need to go on the IMF programme? Would all the above measures being taken by the government improve some of the macro economic fundamentals, notably the foreign exchange reserve position, as well as allow the budget deficit to be lower than would otherwise have been possible. However, two factors may well negate this: first and foremost the budget revenue targets lacked clarity and the international financial institutions have already intimated to the government that there is a need for greater clarity.
In other words, where is the tax money going to be collected from? And second, market sentiment is declining, due to continued political uncertainty, further fuelled by the law and order issues, including the lathi charge on the lawyers in Islamabad on Thursday. This will have a direct impact on investment. It will also impact on the country's GDP which would, in turn, impact on our major macro economic fundamentals that are seen as a percentage of GDP. Given these elements, it is highly likely that the government may be forced to go on the Fund programme before the end of the current calendar year.
