Tag Archives: IMF Loans

Sharp corrections in difficult times – Newspaper | Instant News

After all, this is perhaps one of the steepest fiscal adjustments Pakistan has ever agreed to make in its history.

Recovering from negative economic performance, the first time after 1952, the impact will be no less than three times as dangerous – additional tax burdens, lower spending to raise living standards, and self-pay for the same utilities but not imminent. let-up signs.

Prime Minister Imran Khan’s government has committed to increasing the Federal Revenue Council (FBR) tax collection by around Rs1.27 trillion (about 2.5 percent of GDP), including additional tax measures worth Rs750 billion in its upcoming budget.

This is on top of cutting around Rs280 billion in the development budget, including Rs150 billion in the federal Public Sector Development Program (PSDP) during the current fiscal year and nearly freezing development and defense spending as a percentage of GDP over the next five years. The third and perhaps most painful of all is the gradual rise in electricity costs to generate nearly Rs900 billion (close to 2pc of GDP) in less than a year. Gas price adjustments will be another addition.

The IMF now requires parliament to approve legislation under a deadline unlike its previous program which recognized the legislature cannot be given orders

Performing this challenging task carries its own risks as the national economy recovers from a 0.4 percent contraction, which includes job losses, cuts in wages and rising poverty. The World Bank estimates that the past year and a half has reversed the past 20 years’ achievements in poverty reduction, although there is no clear data to support this at this stage.

“Unfortunately, there are no easy solutions and hard choices have to be made in the power sector,” said Ernesto Rigo, head of the International Monetary Fund’s (IMF) mission to Pakistan, when asked if it was realistic to carry out such an operation when the economy and people were trying to survive in difficult economic times. “If not, it will remain a barrier to economic growth.”

But Prime Minister Khan and his new finance minister Hammad Azhar have already started talking about renegotiating with the IMF in light of the severe third wave of Covid-19 after securing $ 500 million in the first tranche under a revived program. Interestingly, monitoring and sequencing requirements have also been strengthened under the program being revived with five previous actions, 10 revised benchmarks or deadlines, and 11 completely new structural benchmarks.

Mr Rigo, however, believes that the program objectives and design are irreversible even though the ordering can always be reviewed under changing economic conditions. The IMF has issued its growth forecast at 1.5 percent for the year against the 3 percent anticipated by the State Bank of Pakistan (SBP), increasing to 4 percent of GDP next year and then remaining flat at 5 percent through 2026. Growth is expected to pick up gradually. , but only reach its medium-term potential of 5% by 2023-24, slower than envisioned in the first EFF review, due to the major shocks and the need for continued fiscal adjustments, which are expected to offset some of the impacts of a stronger private sector. sector growth in the economy as a whole.

However, the review will now be conducted every three months for close monitoring by IMF staff instead of a biennial review under the original program which remains suspended for one year. In addition, for the first time there is a requirement in the program that requires parliament to approve acts and laws under a deadline. In previous programs, IMF staff used to liaise with parliamentarians to exchange views and advocacy, but always recognized that parliaments cannot be dictated.

The IMF noted that the authorities have committed to 3.3 per cent of a measure of GDP revenue during the program period ending in September 2022 and based on agreed fiscal measures for next year’s budget, a virtual freeze note on defense and development spending in terms of percentage GDP not only next year but also for the next five years.

The IMF predicts the current account deficit will widen to 1.5 percent of GDP in 2020-2021 as a result of the recovery and will continue to widen gradually towards 3 percent in the medium term with stronger imports driven by rising domestic and export demand. However, market-determined exchange rates, together with adequate monetary policy, will help strengthen reserves for more than three and a half months of imports by 2024-25.

Substantial risks cloud prospects, amplified by Covid-19. These fall into the four major groups. First, the heightened uncertainty – particularly around the global recovery and thus the prospects for growth, trade and remittances – arose from the second wave of the pandemic and the emergence of new strains around the world. This could reverse the course of the current pandemic in Pakistan and require additional mitigation efforts, especially if domestic vaccination efforts stall.

Second, policy gaps remain a risk, reinforced by weak implementation capacity and influential vested interests. This mainly affects the fiscal sector and thus debt sustainability, including the risk of provinces not meeting their commitments to budget parameters.

Third, failure to meet program objectives, including those linked to authorities’ AML / CFT action plans with the Financial Action Task Force (FATF), could hinder external funding and investment, the IMF warned.

Fourth, geopolitical tensions could spike oil prices and adverse changes in investor sentiment could impact external financing. At the same time, increased growth and program objectives emerged from the political calendar. With Senate elections due in March, according to the IMF, there is a window to accelerate reforms to the general election scheduled for August 2023. The prime minister is already showing signs of changing his mind.

The Debt Sustainability Analysis confirms that public debt remains sustainable with strong policies, but also shows the risk of policy slips and contingent liabilities. Pakistan’s development and defense budget has decreased significantly over the past two years and will remain nearly flat at a reduced rate over the medium term to 2026 under fiscal consolidation as part of the IMF’s ongoing program.

Documents released by the IMF as part of its resurgence program with Pakistan two weeks ago show that Pakistan’s defense budget has fallen from 3 percent of GDP in 2017-18 to 2.9 percent last year and will further decline to 2.8 percent of GDP this year. this. . It will struggle at the same 2.8 percent of GDP through 2025-26.

Likewise, the country’s overall development program which reached 4.2 percent of GDP in 2017-18 fell to 2.7 percent of GDP last year and 2.6 percent of GDP this year. Development spending is expected to increase slightly to 2.7 percent in the next fiscal year and then range from around 2.8-2.9 percent in 2026, depending on the increase in revenue collection.

Published in Dawn, The Business and Finance Weekly, April 12, 2021


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At the crossroads – Newspapers | Instant News

THE GOVERNMENT is now at a crossroads and whatever road it chooses is likely to make history. Inequality has been reached with the resumption of the IMF program, and the choice facing the government is whether to continue down the path of deficit reduction as committed to the IMF or chart a path considering the upcoming elections. The two cannot go hand in hand for a long time because the first involves tightening the belt and the second involves increasing spending, so choices have to be made.

Editorial: The government cannot grow the economy fast if it has to implement the IMF’s tough stabilization policy

If they choose to stick to the commitments former finance minister Hafeez Sheikh made to the IMF, which received approval from the IMF board on March 24, they would have to sharply curb spending, raise electricity and fuel prices, raise taxes and cancel much of the support already they have given the industry since the Covid crisis, the support that people in the industry have become accustomed to.

The prime minister has come under increasing pressure from within his own party to allow for greater spending by the MNA in their constituencies to help shore up their election prospects in the upcoming elections. To be ready to face their constituents and voters in 2023 – a reality they will face less than two years from now – they argue that they need to immediately start spending on upgrade schemes and projects. So far, Hafeez Sheikh has limited these spending, making him a very unpopular figure in his own party. He pays more attention to his commitments to his creditors than to the demands of his party’s MNA.

There are growing signs that the government intends to try and renegotiate the terms of the Fund program.

Now, there are increasingly signs that the government intends to try and renegotiate the terms of the Fund program that the Sheikh signed. It’s hard to imagine how this could be done, given the board approved the commitment and a $ 500 million first round of approval was issued. Hammad Azhar had said in his inaugural press conference that the IMF agreement could be “reviewed” while Imran Khan said, at the launch of the UN report on Tuesday, that he would seek a “second package” from the IMF.

It is not clear what these words actually mean. Is Hammad talking about the regular reviews that all IMF programs carry out as they are implemented? Or does he or she want to ‘review’ commitments before starting implementation? And by the ‘second package’ is Khan referring to another set of commitments under the existing program? Or does he intend to ask for another loan like the one they got last April when the Covid lockdown started, the $ 1.4 billion from the Fast Financing Facility that came selflessly?

In any case, it would be a great achievement if they managed to persuade the IMF to change the targets described in the commitment the Sheikh made to the IMF prior to his departure. I don’t remember a different time when Fund program targets were renegotiated so quickly after board approval and disbursement of that phase.

If they stick to their commitments, they will make history by becoming the first government in at least a quarter of a century, if not longer, to make IMF-mandated adjustments twice in a period. All previous governments have followed the same path: they come to power, find foreign reserves depleted, approach the IMF for emergency assistance, apply painful adjustments for a year or two (sometimes even three), build reserves and fiscal space, then switch to electoral mode and spending large sums of money to try and shore up their election prospects, a move that once again drained reserves and increased deficits.

No government has managed to win re-election for at least the past three decades, meaning each government ultimately leaves a dwindling treasury and huge deficits for its successors who then walk the same path. We’ve seen this story repeat itself since at least 1988, when our story of a lasting return to the IMF began. What we haven’t seen, however, is the government making adjustments twice, and at the very least, initiating the adjustments just as the looms of an upcoming election looming over.

It is not surprising that they have been cool in carrying out the commitments made by the Sheikh to the IMF. We do not know what that commitment is because the IMF has not, as of this writing, released the program documents. Standard practice is for these documents to be released within days of board approval. But more than 10 working days have passed since the board’s approval on March 24 and there is still no sign of it at this point. The IMF said their operations were slowing down due to Covid-19, and workloads were increasing due to the ongoing spring meeting in DC, but that it started on April 5, more than seven working days after board approval. The delay in publishing program documents was confusing, to say the least.

On the other hand, if the government decides to ‘renegotiate’ this commitment, it risks setting the stage for another balance of payments crisis in a year or two. The fiscal deficit has been set higher than 7%, and the trade deficit is growing faster than exports and monthly remittances. If they decide to pump up growth in the upcoming budget, as Hammad Azhar has tweeted, it will accelerate this and create another new deficit. In this case, the government can make history by becoming the first government to face two balance of payments crises in one period.

This is not the enviable crossroads they face today, and how things go with the IMF is critical to how the political scene will develop.

The author is a business and economics journalist.

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Published in Dawn, April 8, 2021


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IMF forecasts – Newspaper – DAWN.COM | Instant News

IMF the new forecast of a weak economic growth rate of 1.5 percent for Pakistan in the current fiscal year is an increase from October’s forecast of 1pc. However, this is consistent with previous lenders’ views of the economy in the Covid-19 landscape. These new projections are in line with World Bank projections the revised forecast of the 1.3% given in the Pakistan Development Update published in conjunction with the IMF World Economic Review.

Nonetheless, this figure is still below the government’s growth target of 2.1% and is also far less optimistic than Bank Negara’s latest 3% recovery estimate. Last year, the economy has contracted 0.4 percent during the pandemic. Although the growth rates differ, the SBP and the IMF appear to have the same view on other macroeconomic aspects: the fiscal balance, inflation and the current account deficit. Global lenders also expect growth to pick up next year, projecting the economy will grow by 4 percent, with inflation slowing slightly and the current account deficit widening slightly. The medium-term outlook to 2026 shows a relatively stable economic expansion with a stable external sector but higher inflation.

The World Bank has drawn a slightly bleaker picture of the economy and the impact of the virus on people and jobs – “… economic activity is projected to be reduced in the short term by fiscal consolidation measures linked to restarting the IMF’s stabilization program as the economy regains its footing”, he said. The bank expects economic growth to recover slowly given the uncertainty surrounding the pandemic, including the emergence of new strains. The World Bank also points to an increase in poverty, employment and food insecurity due to the impact of the virus on vulnerable segments of the population.

Recent changes to the top ranks of the government’s finance team suggest that the country’s political leadership is concerned about a slower recovery in an environment of high inflation. That recovery of the ‘advisory board’ and the influx of pro-growth entrepreneurs and experts in it reflects a desire to shift direction from economic stabilization to growth to mitigate the damaging effects of the health crisis on the economy and job creation, and to find fiscal space to help vulnerable groups due to the wave currently threatens to derail the fragile recovery seen since last summer.

Prime Minister Imran Khan plans to approach the IMF for relaxation in his loan conditions as he sees disruption in the near future as the infection resurfaces. Indeed, the government is in a difficult position: it cannot grow the economy rapidly or help businesses if it has to implement the IMF’s tough stabilization policies. Nor can it leave the program without sending the wrong signal internationally. The only way out is to convince the IMF to soften its terms for the remaining loan term to give the government room to pursue a pro-growth strategy.

Published in Dawn, April 8, 2021


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