As the government is gearing up for its 6th/7th IMF review, which was moved from 4th June to September 2021, Aaj TV brought on some economics experts on the program “Paisa Bolta hai with Anjum Ibrahim” to discuss Pakistan’s policies in the meantime.
The incumbent Finance Minister of Pakistan Shaukat Tareen has time and again talked about the need to revisit IMF programs so that it incentivizes growth in the economy and allows room for the development of the nation.
The first thing that Dr. Abid Sulehri, Director SDPI said in the program was that the government has not yet begun the mission level talks and the indication is that they will begin post-Eid, which is in the current week.
He said that the inter-governmental organization (IGO) will have to revise the macroeconomic indicators, and thus the framework for the upcoming tranche meetings, as Pakistan outperformed every possible forecasted measure.
Thirdly, he said that the structural reforms IMF had earlier suggested would be reviewed for completion by the organization. Mr. Sulehri said that the main negotiations would be on implementing the structural reforms suggested by the IMF.
Commenting on this, bureau chief Business Recorder Sohail Sarfaraz said that FBR has set an additional revenue target of Rs100 billion to be achieved via enforcement, which he said would be a challenge for the revenue authority.
Quoting previous years’ trends, he said that the previous collection has been around Rs220-240 billion and the target of Rs342 billion is challenging.
Mr. Sarfaraz said that reaching the additional revenue targets due to high inflation is politically harmful to the government, adding that the broadening of the tax base has not worked for the government over the last three years, and the hopes of it happening this year are similar.
Anjum Ibrahim conceded with Business Recorder’s bureau chief that the government has increased its dependence on inflationary measures like petroleum levy.
Talking about the power sector, Senior Reporter Business Recorder Zaheer Abbasi said that this sector has been dealt an even worse hand than the taxation plan.
He said that the government was due to submit a “circular debt management plan” to the IMF and World Bank, but no such document has surfaced.
Abbasi said that even the plan presented by the government is not viable, giving the example of the government’s plan to elongate the payment schedule. He said that the government has announced subsidies and a new railway plan.
It is worth mentioning that for the current FY22, the subsidy to the power sector has been decreased to Rs330 billion down from the Rs550 billion demanded by the power sector to make the sector sustainable.
Dr. Sulehri said that the IMF program would be continued with tradeoffs from both sides, adding that the government has an advantage in that 40 per cent of the capacity charges are to be paid to the government-owned generation companies (GeNCos).
He said that the real problem will emerge in the form in the form of increasing oil prices. He mentioned the fact that the recent price increase has led to the levy going down to zero, and if the prices are increased, it would lead to resistance from the people.
Otherwise, the government would not reach the Rs620 billion revenue target as decided by the budget. He said that other than Punjab, all other provinces have given budget deficits in the recent fiscal year.
He said that if the government loses out on the petroleum levy, provinces perform like last fiscal year in not giving surplus, along with the 100 billion set out by the FBR, it will make up for a mammoth Rs800 billion in the budget deficit for the government in the ongoing FY22.
Talking about the GDP growth in FY21 Director SDPI said that the government has had an advantage on both the expenditure and revenue side of the economy, with the government increasing spending on the development and agriculture sectors, which had been previously “divorced” by the governments, and credit must be given to the pandemic.
He said that the GDP rebasing is due as many new sectors such as the automotive sector have emerged since the last base of 2015, adding that this would lead to a reevaluation of the country’s economic outlook, which would lead to reduced tax-GDP ratio while increasing the size of the economy.
Talking about the IT sector, Anjum Ibrahim said that the revenue target of Rs400 million has been set for the CFY22, and asked Tahir Ameen of Business Recorder if it was achievable.
He said that in the FY21, the government had made Rs27 billion non-tax revenue by auctioning of 3G,4G services, and it is set at Rs45 billion for this fiscal year. It depends on the government’s initiative and the investment attraction in the sector. However, Ameen said that it does not seem that government will be able to realize its targets, but the achievement depends on the government’s will.
Talking about the dependence of cost of borrowing on the upcoming IMF-government talk he said that if the tasks remain inconclusive, the costs will increase substantially.
This would also deter the multilateral borrowing ability of the government and increases the government’s reliance on foreign commercial borrowing.
Tariq Ameen said that even Ishaq Dar, who is blamed for high commercial borrowing, borrowed $7.5 billion in 5 years, however the incumbent government, in its three years has borrowed $9 billion in terms of foreign commercial loans, increasing reliance on commercial loans.
Foreign Exchange Reserves
Talking about the much-boasted foreign exchange reserves, Zuhair Abbasi said that out of $18.2 billion available $9 billion are swap arrangements with China and other countries. He commented even though there has been a high capital inflow, the rupee has been under pressure.
It must be mentioned that through a swap transaction, the Federal Reserve can, in effect, borrow foreign currency to purchase dollars in the foreign exchange market.
Talking about this, Dr. Sulehri said that the rupee value should not be tempered with and avoid past mistakes. He said that the range-bound Rupee is preventing panic, and the import restrictions are leading to increased manufacturing in the country.
He said if the government IMF talks on the current talks are inconclusive in September, initiating a new program would be much better for both sides, as the current one is ready to expire in September 2022.
Zuhair Abbasi contended with Dr. Sulehri’s analysis saying that this would increase production cost in the manufacturing industry as the most industry in Pakistan is import-dependent.
Lastly, Dr. Sulehri said that the three months leading to September are the government’s litmus test.
The program closed with the host terming the economic situation as “challenging” for Pakistan.
Read More: Pakistan’s Economy: long term direction?
Pakistan, a casino economy
On the other hand, Pakistan’s renowned economist Ali Khizar wrote in Business Recorder on 18th July, terming Pakistan’s current markets as behaving like “Casino Economy”, which he argues has seeped in the “real estate, stock market, and other short-term bets in trading of new automobiles and commodities.”
He said the growth activity is limited for the rich, while the government is “supporting poor through direct cash and other subsidies.”
According to Zameen.com, real estate index (based on listing pricing, not actual transaction prices), prices in DHA Lahore Phase 7 and Phase 9 Prism increased by 77 percent and 66 percent respectively in the last 12 months – market anecdotes suggest that price increase is even higher.
While the investors are banking in on the amnesty schemes the people who want to build houses for a living are being deterred. The government’s incentives to bridge housing supply and demand are being offset by what Khizar calls “casino mode” in his article.
He mentioned that in 2021 to date, the top 25 performing companies have exhibited returns of 100-500 percent. Some of these companies are non-operational or loss-making. There are (fake) stories of turnaround. Words like blockchain, artificial intelligence are used to inject life into dead stocks.
Similarly in the automotive market, the capacity utilization of the industry is around 60 percent. None of the players is running at full capacity. Yet virtually every car is selling at a premium. Dealers and investors collude and book cars and while real buyers must either wait for long periods or pay a hefty premium to get instant delivery.
Thus, the inflationary measures by the government are hurting the middle class and poor alike as both sources concluded.