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IMF challenge: Pakistan Government must pay back borrowed funds

March 30, 2015




By: ASAD RIZVI   Published on March 30, 2015
Dear Mr. Nawaz Sharif I have chosen to address you directly through these columns with a view to apprising you about the crux of matter.
It is the most appropriate time to say ‘thank you’ to IMF, as Pakistan’s economy is presently well placed due to falling oil prices and increase flow of remittances. With foreign exchange reserves likely to hit USD 17 billion anytime soon, this is an ideal opportunity to make a sensible and calculated move.
The country has so far borrowed USD 3.7 billion against IMF’s extended three-year agreement under EFF. Instead of waiting until 2016 to borrow full amount, Pakistan should pay back the borrowed funds so that it can improve its poor infrastructure and kick start growth.
Pakistan is still faced with uncountable economic hurdles and to overcome it is necessary to act immediately through capable leadership. Adapting to the required changes and by implementing strategic plans on time would ideally reduce economic vulnerability.
The truth is that under the IMF surveillance program, Pakistan’s hand will remain tight and the country will certainly be deprived of this God gifted opportunity that has come in shape of oil prices collapse. This time Oil prices will remain soft for longer duration, unless geopolitical uncertainty flares up, which should be for a short span of time. Hence, in the coming months the country will get enough space to breath comfortably.
Understanding of monetary management and its linkages is the key. There are many compulsions once IMF document is signed. Greece is a very good example that is not willing to succumb to any outside pressure, because the newly-elected government is well aware of the price it has to pay.
Take Pakistan’s case, IMF policies are not growth-friendly, as it encourages accounting adjustments for window dressing purpose only. Such as, it discourages government borrowings, but seems extremely comfortable with Central Bank lending to banks through open market operation (OMO) as liquidity injection has hit all-time high of Rs 947 billion last week (Friday).
The real culprit or trap to discourage bank lending to corporate was the introduction of “Interest Rate Corridor” (IRC) in August 2009. It was introduced by SBP on IMF’s recommendations. IRC Floor gives protection to liquid banks so that banks are discouraged to lend money to private sector; and it encourages banks to invest in Government paper, which is less risky and offers hefty returns.
Banks investment in government paper has reached 57 percent, whereas, Deposit/Advance lending has dipped down to 52 percent. It gives a very clear idea that why there is no real growth in manufacturing and industrial sector and why there is shortfall in revenue collection. IMF does not care about the economic woes.
However, the overall impact is that both government and bank borrowing hits and inflates the debt side of the balance sheet. On paper it reduces SBP borrowing for budgetary meeting its debt swap condition.
Currency in Circulation that is hovering @ 30 percent is another important inflation number, which is totally ignored by the IMF.
Furthermore, the emphasis is more on increasing gas and electricity tariffs that push inflation higher and helps in demand to keep discount rate high.
IMF has given foreign exchange reserves target, which makes foreign currency very attractive adding constant pressure on Rupee, but exports are stagnant around $25 billion since last 5 years.
Conditions are tailor-made to manage money supply, which discourages M2 growth and to attain this target both Net Domestic Asset (NDA) and Net Foreign Asset (NFA) have to be within certain limits that discourages spending.
Interestingly IMF does not put extreme conditions/pressure by demanding documentation of economy, which is a broader term that requires detailed explanation, such as proper registration of all real estate transactions or has never questioned that why numbers of tax filers are well under one million or why it does not put a condition to increase business community into tax net based on SECP registration.
After 18th amendment why it does not put condition or give target to the Provinces to generate revenue? Neither IMF has set a target to withdraw subsidy given on Tax or rebate through statutory regulatory order (SRO’s) that ranges between Rs 300-350 billion.
Hawks, as always and will demand for Discount Rate hike and depreciation of Rupee, but like Ostrich they close their eyes, when it is argued that it is the leading cause of inflation. Discount Rate Hike and weakening of Rupee are the major causes of sharp surge in debt. It is shortfall in Revenue, which is mother of all ills due to political interference/influence.
For sustainable economic growth, manufacturing and industrial sector need to be fully exploited and with IMF conditionality, our dream of revival of economy will never come true.
Pakistan chose to go to IMF window, when the country had no other choice. But, now with conditions favourable, time is ripe to thank IMF for its timely assistance. With IMF tag, the country will not get a freehand to enjoy economic benefit as its priority is very low deficit target. Therefore it does not allow spending. This is why growth in private sector in real terms is stagnant and the country is faced with Stagflation and revenue collection is low.
Though laden with high debt and liquidity squeeze, majority of the advance economies do not subscribe IMF theory and are not bothered about deficit. For years they have been regularly injecting liquidity to accelerate pace of growth and struggling to create jobs.
SBP is required to cut discount rate in alignment with the inflation rate and market demand. This will allow economic activity to progress. It should be followed by further reduction in PIB Coupon rate to encourage banks’ commercial lending. Similarly NSS rates should be adjusted accordingly. Pensioners and old age savers should be given special rates.
Furthermore, put a cap on investments by banks in government securities or align bank lending to private sector with investment in government securities that will surely give sharp boost to economic activity.
Since, all foreign investments are based on combination of factors based on borrowings and cash injection, from investors’ perspective, if discount rates are not substantially reduced all MOU’s will go waste because funding cost will be too high.
It is important to understand that only government dealing directly gets the benefit of cheap funding. Whereas, all private investments are costly because of risk involved, as it may involves currency risk, currency swap risk or forward cost risk. Therefore, if the KIBOR rate is too high, the customer will be hesitant because of high funding cost, which could be because of Kibor plus customer risk plus borrowing cost at home.
Hence, without a second thought, the need of the hour is first to say good bye to the IMF and simultaneously to have a implementation strategy. With Oil price at an average of USD 55, Pakistan’s 12-month oil purchase will cost nearly USD 8.5 billion, which means savings of nearly USD 6 billion annually, so why not act immediately and let better sense prevail.

(The views expressed in this article are not necessarily those of the newspaper)

Copyright Business Recorder,

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