The IMF review

The IMF Staff Mission for the first review of the Extended Fund Facility (EFF) programme was expected to arrive on December 2, 2013. Instead, the mission arrived prematurely on October 28 and stayed for 11 days. The press statement at the conclusion of the mission can be considered as ‘contingently optimistic’, but it hides more than it reveals.

The mission states “that it is encouraged by the performance made thus far”. Indeed, the government has done a lot, including implementing tough ‘prior’ actions and, more recently, a steep increase of power tariffs. The list of 31 units to be restructured or privatised has been announced. The rupee has depreciated by almost seven per cent during the first quarter.

The statement says that an understanding has been reached with the authorities on a set of economic policies detailed in an updated letter of intent. Why was there a need to update the letter of intent if the performance is so encouraging? What precisely are the changes agreed to in policies by the authorities? Transparency requires that the updated letter of intent be made public.

The statement also says that there has been a strong fiscal performance. FBR revenues have, in fact, shown high double-digit growth. But the real test will come in subsequent months. According to the quarterly projections by the IMF, in the last quarter of 2013-14, FBR revenues are expected to grow by as much as 34 per cent as compared to only nine per cent in the first quarter, 16 per cent in the second quarter and 20 per cent in the third quarter.

According to the mission, the programme remains broadly on track. The operative word here is ‘broadly’. The government has apparently met all the quantitative performance criteria by end of September 2013, with the exception of the target on net international reserves (NIR). Interestingly, the primary objective of the EFF was to improve the external position and help in restoring confidence in the markets. Therefore, the principal performance criterion was NIR. In this critical sense, the programme has failed to perform up till now.

In a significant sentence, the statement says that the authorities have reaffirmed their commitment to align monetary and exchange rate policies to begin to rebuild foreign exchange reserves. Does this mean that we will witness another round of rupee depreciation? In fact, since the mission’s arrival in Pakistan, the currency has fallen by Rs1.40 per dollar in the open market, after a period of some stability. It must be emphasised that the inflation rate of items in the consumption basket of the poor has gone up from six per cent to almost 14 per cent in the last five months and this is imposing an intolerable burden.

It is good that the IMF has been sympathetic in its assessment of achievement on other performance criteria, besides the NIR. According to the recently released State Bank of Pakistan (SBP) figures, federal borrowing exceeded Rs600 billion in the first quarter as compared to the programme target of Rs419 billion, for both federal and provincial governments combined. Perhaps, the latter generated large cash surpluses. The borrowing from the SBP was Rs750 billion, as compared to the limit set at Rs522 billion. Maybe, the programme adjustors came to the rescue.

According to the statement, the IMF staff will prepare a report on the first review for the IMF Executive Board that is tentatively scheduled in late December. Why the delay when Pakistan’s foreign exchange reserves are approaching critically low levels, especially with repayment of $900 million to be made to the Fund in the intervening period? The bottom line is that the next release of $550 million will be made only after approval by the board. This is, of course, conditional on a performance waiver on the level of NIR or a change in its measurement.

Thanks are due to the IMF mission for conducting a sympathetic review. But, given the low-level of reserves, it would have been far more helpful if the mission had recommended front loading of the releases to Pakistan under the EFF to bolster confidence and restore a degree of stability.

Published in The Express Tribune, November 12^th, 2013.

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