It seems the International Monetary Fund has taken the task to reveal the inadequate economic policies of Pakistan Muslim League-Nawaz (PML-N) and Pakistan Tehreek-e-Insaf governments as it has blamed PML-N and PTI for misaligned policies and inadequate policy action, respectively.
Without directly naming the two governments, the international money lender has held both the parties responsible for the critical economic challenges the country is facing.
In its recent report on the $6 billion bailout package to Pakistan, IMF has given a background of how economic difficulties surfaced and how corrective measures were delayed.
PML-N’s Lackluster Progress in Structural Reforms
“Misaligned economic policies, including large fiscal deficits, loose monetary policy, and defence of an overvalued exchange rate, fueled consumption and short-term growth in recent years, but steadily eroded macroeconomic buffers, increased external and public debt, and depleted international reserves,” Dawn quoted from IMF’s report. It said that the IMF has held the PML-N government responsible for unbalanced policies and unfinished reforms.
The IMF stated, economic activity has considerably slowed down and inflation accelerated because of the weakening confidence.
While economic growth has been relatively fast — averaging close to five percent over the past five years — macroeconomic vulnerabilities have rapidly increased on the back of weak policies supporting a consumption- and import-driven growth model, the paper stated. It added that procyclical fiscal policies particularly led to a surge in the FY2018 fiscal deficit to 6.5pc of GDP, 2.5pc higher than budgeted, pushing public debt to 75pc of GDP.
The IMF said the lackluster progress in structural reforms continued to hamper investment and allowed inefficient state-owned entities (SOEs) to linger and a large informal economy to expand. While the macroeconomic deterioration, which eroded the stability gains achieved during 2013-16, had been largely due to homemade factors, the increase in oil prices and more limited capital flows added to this difficult picture.
IMF Blames PTI for Delayed, Unsatisfactory Policy Action
Likewise, Dawn reported, the IMF also blamed the current PTI government for delayed and yet unsatisfactory policy action for correction. Hence despite some exchange rate depreciation and significant monetary policy tightening, sizeable foreign exchange interventions continued through April 2019.
“Similarly, fiscal slippages in the first half of the fiscal year have been significant despite the adoption of two budget amendments. Finally, increases in power and gas tariffs have not been sufficient to stem the accumulation of quasi-fiscal losses,” IMF noted.
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The Fund has noted that the short-term financing form bilateral creditors provided critical financing relief it “deferred the urgency to tackle the underlying problems while increasing the maturing debt obligations due in coming years”.
Resultantly, the IMF stated, economic activity has considerably slowed down and inflation accelerated because of the weakening confidence. While pointing out the high-frequency indicators, the statement said that the large-scale manufacturing index, domestic cement dispatches and motor vehicle sales have continued to deteriorate and confirmed a marked slowdown in economic activity.
Also, the paper noted, fiscal imbalances have continued to build, adding that the overall fiscal deficit (excluding grants) widened to over 7pc of GDP against the budgeted target of 5.1pc despite the adoption of two supplementary budgets. “This deterioration is largely driven by a significant revenue shortfall, equivalent to 1.4 percent of GDP relative to the budget target,” the paper quoted Fund as stating.
Is Pakistan’s Capacity to Repay IMF Adequate?
The IMF has said that Pakistan’s capacity to repay its Fund obligations in a timely manner were adequate but were subject to “higher than usual risks”. It has noted that despite the safeguards included in the design and financing of the program, the risks to the program were “particularly high”.
Progress in governance and institutional building may be opposed by vested interests, weakening structural reforms and medium-term growth prospects.
While admitting that the authorities were committed to carrying out the new program, but the outlook was subject to considerable risks due to domestic policy implementation and external events.
While expressing concerns over the continued decline in reserves and a delay in the adoption of adjustment policies, the IMF noted, risks to Pakistan’s repayment have increased. “Adequate capacity to repay and debt sustainability will depend on strong policy implementation and adequate execution of the existing financing commitments,” it said.
Market-Determined Exchange Rate and Inflation
The international money lender has also highlighted that a market-determined exchange rate instead of the rate determined by the central bank will be crucial, adding that managing a successful transition will ensure popular support for the program.
Subsequently, it said that the failure to maintain an adequately tight monetary policy could lead to exchange rate overshooting and second-round effects on inflation.
IMF has further stated that the financial slippages and resistance to some of the fiscal measures could undermine the program’s fiscal consolidation strategy and put debt sustainability at risk.
“Progress in governance and institutional building may be opposed by vested interests, weakening structural reforms and medium-term growth prospects,” it said.
PTI’s Thin Majority in Senate and Provinces’ Role
Moreover, the Fund noted that the absence of the ruling party’s majority in the upper house of parliament may hinder the adoption of legislation needed to achieve program objectives.
Also, it said, there was a risk that provinces may under deliver on their commitments to budget parameters.
Finally, a potential blacklisting by the Financial Action Task Force could result in a freeze of capital inflows to Pakistan, jeopardizing the financing assurances under the program. Other risks, including those related to domestic security conditions, global trade, growth in major trading partners, oil prices and tighter global financial conditions, could exacerbate these challenges.