ECONOMY REELING UNDER IMF'S HARSH CONDITIONS
July 20 - 26, 2009
The week-long talks between Pakistani authorities and International Monetary Fund (IMF) that started earlier this month in Istanbul for release of the already delayed third tranche of a $7.6 billion loan, remained inconclusive, as the Washington-based lender has linked the release of the third tranche with the performance of the economy and fulfilling of the remaining conditions in the first quarter (July-September) of 2009-10.
A meeting of the IMF executive board scheduled for August 7 would determine the fate of the $875 million tranche, as Islamabad has failed to meet the commitments made in the $7.6 billion standby arrangement agreed last November. Earlier the government claimed that it had persuaded the IMF to waive for six months a condition under which subsidy on electricity was to be removed and tariff enhanced. Critics say that IMF has engineered a situation in the country where foreign investors are skeptical, local investors disbelieving and political turmoil has gripped the country.
Pakistani delegation led by Adviser to the Prime Minister on Finance Shaukat Tarin recently held weeklong talks with IMF officials in Istanbul. The IMF team reviewed the country's March-June economic indicators and measures taken in the budget 2009-10 ahead of giving a go-ahead for the release of the tranche. Last November, the country was forced to turn to the IMF for a $7.6 billion rescue package after its current account widened to a record and its foreign reserves shrank 75 percent in a year to $3.45 billion. So far, the country has received $3.1 billion as first tranche in November and the $840 million in March as second installment.
$5.668 billion foreign loans were injected into the country's tumbling economy during the last fiscal year. IMF is the biggest contributor to the total foreign assistance of $5.668 billion received by the country in the last fiscal year. The critics say that even the foreign assistance could not put brakes on the deterioration of the economy, as irrationally high interest rates and tight monetary policy of the central bank is holding back its growth.
The government pays 17.5 per cent subsidy on electricity and under an earlier agreement with IMF, all subsidies were to end with the start of the current financial year (July 1). Pakistani officials had told the IMF that the government could not raise the tariff as long as there was electricity load shedding. The IMF has however rejected long-hours of load shedding as a reason for not increasing power tariff and advised the government to improve management to avoid public criticism.
Cash-strapped country has already sent a formal request to IMF for additional $4 billion 'Flexible Credit Line' (FCL) facility, which would only be used in case of delay in commitments by Friends of Democratic Pakistan (FODP). The country's exports fell 6.7 percent to $17.8 billion in the full year to June 30 and imports declined 12.9 percent to $34.8 billion. The trade gap narrowed 18.5 percent to $17 billion, according to the Federal Bureau of Statistics (FBS).
Shrinking domestic market and contracting domestic trade is rendering millions jobless, which has multiplied the economic sufferings of masses who are already reeling under high inflation, lawlessness and uncertainty, according to local traders and businesspersons. The country cannot sustain with dwindling domestic trade, which is largest employer outside agriculture. Industry contributes 20 percent of GDP and 60 per cent taxes.
The soaring power and gas tariffs are likely to put additional burden on the industry and squeeze the gross margins of the industry, according to the analysts. The local manufacturers are unhappy with the government for failing to reduce the cost of doing business, seen as the key to industrial revival and for reinstating minimum income tax in the budget 2009-10. They forecast more industrial closures and job losses over the next one year. The businesspersons stress the need to take measures for restoration of industry demanding withdrawal of surcharge on electricity bills in order to provide some relief to the consumers, as the load shedding irked the whole nation and industry is going to close down due to energy crises.
The government also intends to increase the electricity tariff by 17 to 20 per cent, as it has assured the IMF of gradually removing all subsidies to the power sector during the current financial year. The IMF is pushing the government to withdraw the subsidy being offered to the power consumers and increase the prices of electricity. The government had targeted collection from the proposed carbon surcharge on petroleum products at Rs 122 billion in the current financial year budget. The distribution companies expected an additional earning of Rs35 billion after increase in power tariff.
IMF had supported the imposition of carbon surcharge on POL products in 2009-10 budget considering it a reliable revenue source for the budget. Analysts however fear that the carbon surcharge would spark a fresh wave of inflation and particularly hit food prices, which had witnessed an average 22 per cent inflation during last fiscal 2008-09. They believe that the government was pressurized by the IMF to impose carbon tax, which was widely criticized by the public, transporters, industrialists, and traders.
The country mortgaged its economic sovereignty and right to make the budget after accepting conditions of the IMF programme, according to the critics.
The IMF has been emphasizing on improvement in tax-to-GDP ratio, which is still in single digit and lowest in the region. The government has set a tax-to-GDP target of 9.6 per cent for the fiscal year 2009-10, which is higher than nine per cent of last year. Rich have again escaped taxation while poor were cornered, according to Pakistan Economy Watch (PEW), an independent forum run by a team of experts. The pro-rich budget, according to the PEW, has overburdened masses on the dictation of IMF while some best-loved sectors were supported on the cost of others.
Officials have now accepted that the inclusion of carbon tax in the 2009-10 Federal budget was "technically" a wrong decision on the part of the government. The petroleum product prices were again increased last week through the Presidential Ordinance promulgated with immediate effect for the imposition of PDL instead of carbon surcharge. Petrol price has been increased by 10 rupees per liter, diesel by eight rupees per liter and light speed diesel by three rupees per liter.
The increase in petroleum products rates would increase the cost of living of the poor. The increase in petrol rates would mainly hit the lower middle class more than the relatively affluent car users that have converted mostly to CNG. For the poor using one-liter kerosene per day, the recent increase would add Rs144 in their monthly budget, according to one estimate.
Analysts believe that Supreme Court's decision to revise domestic oil prices downward could have helped arrest inflation, had the government not stepped in to impose PDL.
Sensitive price indicator (SPI) inflation for the week ended on July 9, for the lowest income group (up to Rs3,000) recorded at 231.19 as against 228.11 registered in the previous week, according to the FBS. As compared to the corresponding week of last year, the SPI for combined group in the week under review witnessed an increase of 10.38 per cent. The Consumer Price Index (CPI) Inflation set to rise due to latest presidential move by restoring the petroleum development levy-settled in double digits during the financial year 2008-09. CPI inflation closed at 20.77 percent for the last fiscal, according to the FBS.
The analysts believe that the economic growth revival largely hinges on the performance of the manufacturing sector and security environment in the country, which is currently at war with Taliban insurgents. Critics say that the government's ill-conceived policies stagnated the growth and consequently closure of industries is drying up government revenue. The country slashed total volume of Public Sector Development Programme (PSDP) for the last fiscal year by Rs108.9 billion to Rs 262.1 billion from Rs 371 billion due to financial constraints.
Pakistan's debt service burden would increase in the next two years. At the end of last fiscal year 2007-08, the country's public sector debt stock stood at 57.4 percent of GDP, with domestic public debt 31.2 percent of GDP and external public debt 26.2 percent of GDP and debt service was about 15 percent of exports of goods and services. Interest payments on domestic debt accounted for only 12 percent of total interest expenditure, partially reflecting that official creditors account for the bulk of total external debt. A significant burden for the budget is the interest payments 4.7 percent of GDP, accounting for 32.6 percent of total revenue excluding grants and 26.3 percent of current expenditures. The country's foreign debt and liabilities have risen by $15.01 billion during the last three and a half years from $35.834 billion at the end of June 2005 to $50.85 billion at the end of December 2008.
Local experts believe that the country's entry into an IMF program has caused a significant economic slowdown and the government is facing a major challenge in managing a slowing economy. Under IMF pressure, the central bank raised discount rate to 15 percent in November 2008, and kept it unchanged in its monetary-policy statement on January 31. Despite high interest rate, the core-inflation remained at a higher side clearly indicating that this policy did not yield the required results. In February, the inflation rose after declining month on month for three months after hitting a record high of 25 percent last October. The spiraling food prices and weakening Pakistani rupee pushed up consumer price index (CPI) inflation to an all-time high of 21.07 percent in February from a year earlier.
Poverty level would increase in the coming days as dependence on IMF would hurt economy, ultimately pushing more and more people below the poverty line, according to the experts. The country's industrial output plunged by 5.35 percent during July-January period of last fiscal year over the corresponding period of previous year. The downfall in auto, textile, electronic, petroleum and other key sectors adversely affected the performance of large scale manufacturing (LSM), which was slumped by 8.91 percent in January.
Critics contend that the small improvements in some macroeconomic indicators have not been achieved due to efforts of the government but as a result of adjustments to the new realities. They argue that the improvement in forex reserves is due to donor inflows, inflation has declined because of low consumption by poor. The negative growth in the large-scale manufacturing indicates that the increase in imports was not in the industrial raw material rather its imports have gone down. The industry is facing power shortages and squeezing local and international demand, while banks are not risking their money to support the private sector.
Putting brakes on monetary tightening for the first time since 2002, the central bank in its last monetary policy statement lowered its discount rate, the key policy rate, by 100 basis points to 14 percent. Local businessmen still consider interest rates very high and 100bps cut in the discount rate a cosmetic move, which can hardly help the ailing economy.
Despite hiking interest rate and withdrawing subsidies on petroleum products, the government has so far failed to tame inflation, which is still at a higher side. The current monetary policy has virtually failed to achieve its objective of combating inflation, which has pushed up the cost of living.
Under the IMF programme, the country witnessed a significant economic slowdown, as macroeconomic stability took precedence over growth. The per capita income witnessed negative growth during the last fiscal year owing to the slowest GDP growth in 10 years and 30 per cent depreciation of the rupee against the US dollar. The country's economy is still facing four major challenges including decelerating growth; rising inflation; growing fiscal deficit; and the widening gap in trade and a plummeting exchange rate.
Though the central bank has cut discount rate by 100 basis points to 14 per cent, yet it is still highest in Asia and it is not enough to reduce the bank's lending rate and to stimulate the country's economy. Local analysts believe that high interest rates are the main reason behind the fall in the country's industrial output. They contend that reduction in discount rate by 200 basis points could provide some relief to the ailing industry and trade.
IMF follows the agenda of colonial forces, as it tries to convert a financial crisis in the recipient country into a political crisis, according to the analysts. It pressurizes the government to initiate such anti-people move that distance the people from the government. It stops installment to put pressure on the government for carrying out its agenda.
Pakistan is being pressurized by the IMF to do more after the country has been forced to raise interest rates by 2 per cent and withdraw subsidy on gas. Prior to approval of loans amounting to $ 7.6 billion as rescue package, the IMF had put harsh conditions including withdrawal of subsidies across the board by the end of the last fiscal year and barring the central bank's intervention in the foreign exchange market. The analysts believe that the IMF is following the same Washington agenda under which Islamabad was ever asked to do more in countering terrorism during last five years despite the country had paid heavy human and economic costs for being on frontline position in US-led war on terror. The tough conditions being dictated by the IMF under Washington dictates could convert the current financial crisis into a political crisis in the nuclear armed country, according to the analysts.
The democratic governments from 1988 to 1999 did not complete seven separate IMF loan programs because of tough IMF conditions. IMF's bitter prescriptions for Pakistan ailing economy would further weaken it instead of making it healthy pushing over 5 million more people in the country under the poverty line and rendering 2 million people jobless. As the country's foreign exchange reserves have risen to $11.84 billion, the present government should think over the way out of the IMF program instead of asking for more loan from the international lender.