Wednesday Apr 13 2022

Going back to the IMF

International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, US. — Reuters/File
International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, US. — Reuters/File  

The ousted PTI government, claiming that it had inherited an economic mess, has left behind a situation bordering on disarray.

Two headline variables indicative of the seriousness of the economic crisis are inflation and the depreciating value of the rupee. Accordingly, the incoming government needs to take some immediate decisions to address matters of the consumer price line and the value of the rupee.

Overall, it will also need to address the larger matters of the budget and the current account deficits. In this regard, the context of decision-making will have to be kept in mind — Pakistan is locked into an IMF programme, from which it cannot get out in the short run.

The two immediate budget issues that the incoming government needs to decide upon are gasoline price and the electricity rate, which the erstwhile government had lowered in contravention of the agreement with the IMF, and the cost of which to the government is estimated at Rs280-300 billion. Pressure for enhancement in both will be intense but will be politically damaging and hand the now-opposition PTI with a strong election card. The argument that the post-PTI government has inherited a bad economy will not hold any water anymore.

A political decision to hold on to the current gasoline and electricity prices will amount to continuing the haemorrhaging of the budget deficit and earn the IMF’s ire. And any impediment to the timely release of IMF tranches will bleed the rupee vis-a-vis the dollar, fueling a costly rise in the value of the country’s debt and a punishing spiral of inflation.

Currently, the overall budget deficit is reported to be around Rs4,000 billion. The deficit needs to be reduced by 10% — Rs400 billion, via cuts in non-development expenditure. This will have dual positive impacts. One, it will enable the government to stave off having to increase fuel and electricity prices, at least till the end of the calendar year. And two, it will moderate the inflationary spiral, even if modestly. Both will be viewed positively by the populace.

The current account balance, already precarious, also threatens to worsen. The Ukraine war has led to sharp increases in world food and fuel prices, particularly wheat and oil. And, given that Pakistan imports both — wheat, partially, and oil, almost entirely — the current account impact can be devastating. A wheat shortage and price rise can be particularly costly politically.

Given normal harvests, Pakistan’s own wheat output generally lasts till December-January and the market has to be supplied with imported wheat during February-March, till the new harvest in March-April brings in wheat to the market. Importing wheat to feed the market over February-March will entail a heavy cost in foreign exchange, which will need to be borrowed at an even higher cost. The wheat sowing season is now and the wheat import crisis can be averted if the procurement price of wheat is increased now to induce higher acreage devoted to wheat.

Further, foreign exchange outflows also occur on account of the import of pulses and palm oil, both essential consumer items. This outflow can be plugged by introducing procurement prices for pulses and sunflower in order to induce higher acreage devoted to these two items. The fiscal cost of financing the procurement prices of wheat, pulses and sunflower can be covered via a corresponding reduction in non-essential non-development expenditure.

Overall, the current account deficit has been rising due to the continuing rise in imports and stagnant exports. This rise is likely to accelerate further on account of world oil price volatility. Monetary measures (such as raising interest rates, altering the deposit ratio or cash margins on imports) impacts and hurts the economy across the board. A nuanced non-market administrative targeted approach is needed.

As an immediate measure, imports can be reduced by about 5% — $2-3 billion via a blanket ban on non-essential consumer goods: food, beverages, tobacco, clothing, cosmetics, building materials, home furnishings, and non-commercial automobiles. None of these is bought by the economically stressed bottom 80% of the population, but drains the economy and is an affront to those who cannot even afford three bare meals a day.

Essentially, the government has to decide to adopt policies to provide sustained relief to the people — beyond the hackneyed relief measures that only have media headline value. It has to decide to abandon — even if partially — the market-globalisation philosophy and adopt direct measures for the benefit of the economically stressed section of the population. This must also be the basis of budget-making for the years 2022-23. The IMF is primarily concerned with the budget and current account deficits, and if the government can show a home-grown path to address the two, the agreement with the IMF can be maintained.

The writer was a member of the 7th NFC and is now a member of the 10th NFC. He tweets @kaiserbengali

Originally published in The News