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IMF: The Ninth Review | Dr Hafiz A Pasha

The IMF has once again adopted a soft and sympathetic approach to reviewing Pakistan's
performance under the Extended Fund Facility. Two key quantitative performance criteria on net
domestic assets (NDA) of the SBP and the fiscal deficit target were missed, as well as the
indicative target on tax revenue. Despite this, the ninth review has been successfully completed.

The economic projections made for 2015-16 are also on the positive side. Real GDP is
expected to grow by about 4.5 percent. Inflation is likely to remain low and rise only up to 4.5
percent by the end of the fiscal year. The foreign exchange reserve position is considered
satisfactory at $15.2 billion, rising by $1.7 billion in the first quarter of 2015-16.

The failure to meet the fiscal deficit target, primarily due to a shortfall in FBR revenues, is
ominous. Already, the target for reduction of the deficit from 5.3 percent last year to 4.3 percent
of the GDP in 2015-16 looks unattainable. There was a shortfall of Rs 40 billion in attainment of
the first quarter FBR revenue target. Higher growth of revenues in October may be due to the
delay in the filing of returns in September.

The government has already committed to cutting back the national PSDP for 2015-16 from the
budgeted level by almost 25 percent. Then there is the additional fiscal cost of the Prime
Minister's agriculture relief package of almost Rs 120 billion and how this will be accommodated
in the budget. The question is what are the additional measures of taxation and expenditure
cutting that the Ministry of Finance has explicitly committed to as actions prior to the release of
the next tranche? Like last year, are we in for a spate of mini budgets? There is need to bring
these changes for approval before the National Assembly.

The economic projections also appear too optimistic. First, indications are that a GDP growth
rate of 4.5 percent in 2015-16 is unlikely. The cotton crop has apparently failed and output could
be down by almost 10 percent in relation to last year. Manufactured exports, especially of
textiles, are also down. The closure of the Pakistan Steel Mill will negatively impact on the
Quantum Index of Manufacturing. Falling commodity prices are likely to be accompanied by a
lower supply response generally in agriculture. Altogether, a growth rate of above 3.5 percent
looks unlikely.

The extremely worrying feature of the economy is the low level of private investment, despite
the record low level of interest rates. The process of 'crowding out' from credit continues.
Government borrowing from the banks has risen by almost ten times by mid-October over last
year's level. Also, there appears to be a reluctance to invest in the presence of low prices and
limited growth of demand in the economy. For example, imports of textile and agricultural
machinery have fallen by 10 percent and 46 percent respectively.

The rise in foreign exchange reserves in the first quarter of $1.7 billion is sizeable. However,
over 75 percent of the increase is due to borrowings. This includes $500 million from the
floatation of the Eurobond at a high interest cost, $505 million net credit from the IMF and $300
million of loans from multilateral and bilateral agencies. Non-debt creating capital inflows have

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been low. Foreign private investment (direct plus portfolio) is down by as much as 68 percent.
There is no evidence yet that CPEC related capital inflows have started.

The substantial improvement in the current account deficit is welcome. However, it has been
achieved by a bigger fall in imports than in exports. The former is due to a large decline in the oil
import bill of 42 percent. From the view point of mid-term sustainability, the improvement in the
current account deficit should ideally also come from higher exports. Currently, both export
quantities and prices are generally down. The concessions offered up to now as part of the
textile package are likely to be inadequate in significantly promoting exports. It will be interesting
to see what the quantitative performance criterion in the IMF Programme is for net international
reserves in the second quarter. This will indicate if there is agreement for larger market
purchases by the SBP of foreign exchange, thereby putting more pressure on the rupee.

There is actually little improvement in the power sector. The latest Nepra report has been
scathing in character. System losses have not significantly declined. Power generation has
shown growth of only 3 percent in the first quarter. The Nandipur Project has been a near
fiasco. Circular debt has piled up to over Rs 600 billion. Subsidies are being curtailed under IMF
pressure by introduction of a large tariff surcharge, at a time when fuel costs are falling. This is
yet one more reason for the declining competitiveness of exports.

The co-operative approach of the IMF is welcome. But the problem is that an overly positive
assessment of the state of the economy creates a sense of complacency and reduces the
commitment to structural reforms. A lot more needs to be done in the area of tax reform,
improving performance of the power sector, stimulating private investment and exports,
restructuring loss-making public enterprises, reversing the negative trend in social indicators
and so on.

(The writer is the Managing Director of the Institute for Policy Reforms and a former
Federal Minister)

Source: http://www.brecorder.com/articles-a-letters/187:articles/1244733:imf-the-ninth-
review/?date=2015-11-10

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