Islamabad, Sept. 25: /DNA/ – The International Monetary Fund (IMF) on September 1, 2022 released a staff report on the Seventh and Eighth Reviews of the Extended Arrangement under the Extended Financing Facility (EFF). According to the review report, the Pakistani authorities are authorized to draw $1.1 billion, given the measures taken by the authorities to address fiscal and external challenges. The IMF Executive Board also approved the extension of the EFF to June 2023 along with additional Special Drawing Rights (SDRs) of 720 million, bringing total access under the EFF to about 6.5 billion. dollars.
This was stated by Dr Nadeem ul Haque, Vice-Chancellor, and Dr Durre Nayab Pro Vice-Chancellor of the Pakistan Institute of Development Economics (PIDE), during a meeting with a group of seasoned journalists here in Islamabad. They indicated that the review report also identified some priority measures for the Pakistani authorities to consider, such as the implementation of an approved budget, a market-determined exchange rate policy, a proactive monetary policy and policy, expansion of the social safety net, and structural reforms related to public enterprise (PE) performance and governance. The set of measures identified contains both short and medium term measures to promote long term growth. In this regard, the Pakistan Institute of Development Economics (PIDE) has also worked hard to identify the measures needed to remove bottlenecks in the economy to improve productivity and increase growth. Therefore, the purpose of the PIDE report is twofold, ie a commentary on the measures suggested by the review report and on the other measures that should be part of the program.
Dr. Nadeem ul Haque said that the PIDE (RAPID) reform program noted that Pakistan needed a sustainable growth rate of around 8% over a long period given the population pressure. However, the review report showed that Pakistan’s economy started to overheat at a growth rate of around 6%. The PIDE noted that this is mainly due to the economy’s low investment rate and a deterioration in the long-term trend of investment as a percentage of GDP. In addition, there are significant regulatory and productivity constraints in the economy that the program should address.
He said the review report also suggested that the State Bank of Pakistan (SBP) would pursue tight monetary policy in line with the standard prescription to limit higher inflation expectations. According to the review, the SBP and IMF staff agreed on a tight monetary policy to achieve a positive real interest rate. However, the real rate remains negative! And the real rate should remain negative for the duration of the program. This implies that the nominal interest rate should be 20% or even higher. However, it would be difficult for the SBP to reduce inflation through monetary tightening due to the following facts:
- The SBP began to tighten monetary policy in November 2021, but failed to achieve a positive real rate and control inflation.
- The review report forecasts broad money growth to be around 12% in fiscal year 2023. Therefore, PIDE argues that demand pressure will not be a major driver of inflation. in the near future. The current wave of inflation may be driven more by supply-side shocks.
- PIDE estimates suggest that supply-side pressures will contribute to inflation of more than 80% in fiscal 2023. Therefore, further monetary policy tightening may not be desirable. . Interestingly, the review report’s risk assessment matrix also highlights that several supply shocks, including disruption of supply chains, rising energy prices and rising commodity prices, are more important for inflation. Nevertheless, a further tightening of monetary policy could reduce pressures on exchange rates. The current pressure from the external sector is due to the increase in import demand. Tight monetary policy can reduce pressure from the external sector through effective management of import demand. The review report, however, did not take a clear position on this issue.
- We have also agreed with the IMF that all concessional interest rates should be eliminated to ensure that the policy rate has bite. Unfortunately, we don’t see the program recommending a timeline to achieve this goal. There should be a sunset clause.
Speaking on the occasion, Dr. Nayab said that PIDE has substantial work on tariffs and regulations, which should be included in future programs, and the real estate sector which goes far beyond the program document. . So, rather than trying to curb the activity of the sector and treating it as a pariah, it is a question of creating a real estate market.
She said Pakistan had suffered from a 75-year violent campaign against corruption, which was difficult to disentangle from the ongoing power struggle. The National Accountability Bureau (NAB) and other investigative agencies have injured more innocent people than arrested criminals. Unfortunately, most of our anti-corruption campaigns have been political in nature. Such campaigns have also led to highly intrusive bureaucracy and documentation. All of this has eroded our social capital and scared away investment. Because of this campaign, decision making is paralyzed and risk taking has ceased.
Therefore, the PIDE noted that the inefficient incentive system promotes bad governance and facilitates corruption; the PIDE Sludge report noted that huge rents are available, and the protection policy also promotes poor outcomes.
She added that while the focus on the health of the financial sector is welcome, there is little mention of financial sector reform in the review report. The PIDE noted that smaller banks would close or merge with larger banks, so the competitiveness of the banking system must be considered.
According to the PIDE report on the current IMF program, the review report projects a 47% reduction in the current account deficit in fiscal year 2023, with the deficit shrinking from $17.3 billion in fiscal year 2023. fiscal 2022 to $9.3 billion in fiscal 2023. These projections are based on the assumption of an increase in the export bill of $3.2 billion and a decrease of 3, $3 billion import bill. In addition, the projections also assumed adherence to the “market-based” exchange rate. Now the question arises, what will be the real effective exchange rate (REER) given that we have imposed bans, regulatory fees, surcharges, extreme exchange controls and heavy foreign exchange interventions?
According to press release issued by PIDE office in Islamabad, circular debt first erupted in 2006. Since then, this is the third IMF program focused on deteriorating circular debt with little impact . We always focus on raising prices and shifting the burden to consumers without worrying about structural losses. The PIDE notes that tariff increases without structural changes can increase inefficiencies and losses in the sector. End consumer tariffs are very sensitive to losses in the transmission and distribution networks and to bill collections. Unit increase in price of Rs. 1 adds to further loss of over Rs. 10 billion.
In conversation with the senior reporter in Islamabad, PIDE management said that increasing tariffs alone has not solved circular debt or inefficiencies in the power sector. The electricity sector needs serious decentralization of decision-making and an overhaul of management. Technical issues, such as line loss and bill collection, must be resolved locally by local management.
Public distribution companies (DISCO) are incorporated, but only on paper; it is unclear under which law DISCOs are governed. Over the years, the footprint of government on the sector (division of power) has become larger instead of decentralizing power.
PIDE suggested that unless all companies are made responsible and accountable for all their decisions and finances, it would not be possible to bring efficiency to the electricity sector. These companies need independent boards of directors without any influence from the bureaucracy.
The billing system should be decentralized and carefully targeted with technology-based prepaid smart meters. Prepaid smart meters will also bring billing transparency, effective demand management and business efficiency to distribution companies.
Furthermore, social protection has become a political instrument. Social welfare expenditure is on an upward trend and stands at around Rs. 316 billion in the review report. While well-intentioned, the program seeks to grow further alongside indexing.
Poverty estimates from PIDE also suggest that the poverty rate in Pakistan is around 21.5%. We note that the BISP already covers far more people than the ultra-poor. Yet, social protection is an expanding agenda in Pakistan, and provinces also have social protection policies. Social protection is through utility shops, provision of health cards, National Rural Support Program (NRSP), Pakistan Poverty Alleviation Fund (PPAF), micro-finance networks , fuel subsidies, provision of education by the public sector and a public body. pension plan held.
Perhaps it is necessary to undertake a critical review of this whole system and seek consolidation and productivity gains. Moreover, these schemes have no concept of graduation or mobility. This is perhaps indicative of the economic pessimism in the country. The PIDE noted that overlapping expenditures for social protection under different public schemes are not taken into account.