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IMF Debate – Pakistan

August 29, 2016

Soon after IMF’s End of Mission Final Review (Pakistan), there was a press release by the staff team that conveyed its preliminary findings, which according to the website do not necessarily represent view of IMF board.

Interestingly unlike IMF, which is commonly known for its tough and firm behavior prior to offering loan, in its concluding remark gave extremely positive input on growth, inflation, exchange reserves, budget deficit and by praising revenue collection for meeting its target is an interesting observation.

While, it opted for softer tone on important issues such as cash flow energy, exports and global uncertainty, which is lingering on since 2008.

IMF is optimistic, on China Pakistan Economic Corridor (CPEC) investments, which is 74 pct energy related and is stretched until next 15 years. Its Bullish sentiment is mindboggling, as the view expressed is common statement, which is not backed by hypothesis or any logic of evidential support.
Hence, combination of soft and positive approach has opened a debate about the overall economic performance because Pakistan’s economy is now exposed to different types of risk, as the economic survival is totally reliant on Domestic and Foreign Borrowings.

The unaddressed risk associated to the economy are looming debt and deficit financing risk linked to cash flow, credit risk, liquidity risk and or operational risk, which will ultimately increase in shape of legal and regulatory risk.

IMF did not utter anything on Circular Debt. It did mention about minor breach of Budget deficit and Net Domestic Asset (NDA). But failed to put a note on Currency in Circulation that has surged to alarming high level and is Rs 3.335 Trillion, largely because of undocumented economy.
IMF growth sentiment is mainly dependent on expansion of Construction activity and CPEC investments, but minus CPEC how growth is possible when liquidity in the banking system is completely choked. There is hardly any vision or plan for large industrial and manufacturing sector growth.

More importantly, since August 2008, SBP is compelled to adopt dual policy, as it was encouraged by IMF to maintain tighter stance and simultaneously offer HELICOPTER MONEY to banks through its Open Market Operations (OMO) for investments in Government Securities.

Against Commercial Bank Deposit of Rs 10.3 Trillion, total amount of investments in Government Paper is Rs 6.169 Trillion. Exports are at 7-year low and remittances are likely to remain almost flat to mildly up.

Other major factors responsible for causing economic instability are the decade’s old outdated protectionist approach by the various elected and non-elected governments by not realigning with the market norms. Looking at the past trend, I can safely say that it is intentional protected approach by the respective governments to refuse imposition of tax on all types of income and to solely rely on indirect taxes that constitutes nearly 65-68 pct of the total collection. Share of Direct Tax in 2000-01 was 32 pct, which surged to almost 40 pct in 2006-07 and is down again to around 32-33 pct.

What is questionable is that IMF, which is constantly lending to Pakistan since 1988 and has so far given loan on almost 17-18 occasions. They are known for imposing tough conditions before offering funding and they put lot of emphasis on revenue collection. Then all these years, why IMF opted for a friendly approach and did not demand increase in Tax Collection that kept on declining, as couple of years ago Tax to GDP fell below 10 pct and is now roughly 11.5 pct (current) from 17.4 pct (1988). This has caused economic disaster, as poverty rate during this period jumped from 23.5 pct to around 40 pct. Then unemployment rate was 3.1 pct, which is now a whisker below 6 pct.

Another economic nuisance that IMF should highlight is the common practice to regularly rescue business community by offering tax payers money by means of subsidies and rebates, which is extremely discouraging for the Middle to Lower Class of the society, which has to pay the price to rescue mostly tax evaders for their faulty business decisions. If it is not in its purview, then IMF has no right to demand rising of taxes by indirect means that adds burden on the poorest of the population.


Growth/Budget Deficit
Projection of 5 pct growth is an achievable target if we combine CPEC along with as higher Exports minus Circular Debt, which is nearly 1 pct of the GDP.

But I disagree with the Bullish idea of Private sector growth, which is the major cause of Economic Debacle. Spending and Austerity are two worst combinations and maintaining Budget Deficit within tighter limit along with stimulus is an impossible task.

Allocation of Circular Debt amount is another dodgy and key number that can severely impact both GDP and Fiscal Deficit number.

However, combination of factors such as Exports, CPEC, Cut in Target Rate, Tax relief to 5-sectors and increased Bank Lending should comfortably push growth beyond 5 pct.

Exports & Exchange Rate

There is no rocket science about possibility of growth in Export Sector.

Despite lackluster trade policy, export growth will certainly bounce back not due to positive shift in policy stance or because of excessive demand of Pakistani goods.

It is likely to occur because of bad global weather pattern, which increases the probability of excessive floods, hurricane and drought that will push food prices higher.

SBP is required to behave in proactive manner and allocate enough funding to the agriculture sector through commercial banks. Such a move will give much needed boost to the export sector.

Textile sector will surely make a big come back. Hence, if we add overall growth, IMF target of 7 pct growth will be comfortably be doubled.

However, Pakistan is still way behind in the run and to increase productivity, it is required to concentrate to improve its farming method by modernization and efficient farming.


Current Exchange Rate Policy is commendable, as excessive depreciation of Pak Rupee in past 6-years failed to bring desired result. Instead weak Rupee brought misery to the poverty ridden nation in shape of inflation.

Analyst/Economist advocating weaker Rupee should have no qualm about weaker Rupee, as SBP has already blessed Business Community by sharply slashing export refinance rate by 5.5 pct, which is down by more than market expectation from 10 pct in Dec 2010 to current levels.

SBP’s Target rate of 5.75 pct is extremely competitive that not only compensates against stable Pak Rupee, it also counters inflation.

In my view, arguing for weak Rupee and comparing Pakistan’s exchange rate with USA, UK, China, Turkey, India or Indonesia makes little or no sense.

How much did the Pakistan’s export increase since 2010, as Rupee is in 6-years weakened by nearly 25 pct ?

Then my counter argument is that where is the interest rate comparison ?

Six years ago, FED was at nearly Zero, China interest rate is down by mere 0.75 pct and in same period UK lowered its Bank Rate by 0.5 pct.

For readers information India during this period jacked up its interest rate by 2.25 pct. In six years Indonesia slashed its rate by 1 pct and during this period Turkey raised its interest by 1 pct to nearly 7 pct.

Further, there is lot of groaning about higher petrol prices in Pakistan, for record sake only in Indonesia petrol price is cheaper by 2 cents than Pakistan. It is costlier in all other countries.

Inflation & Debt

IMF’s inflation target is 5.2 pct for FY 2016-17, which is against expectation of higher oil prices. Based on signs of Global slowdown, as China, Europe and Japan are in struggling mode. BREXIT is another threatening factor that can have larger impact on Economies of the World.

Therefore, I see no reason for sharp rise of petroleum prices in Pakistan. It means unless energy prices are further jacked up, inflation momentum will remain slow.
Spurt in food prices is another factor that can spur inflation, but this is normally a season or weather related short term phenomena. Hence, I see no reason for inflation to surpass 5 pct and based on my calculation inflation is likely to close around 4.75 pct by FY 16-17.


Pakistan’s external has surpassed USD 70 Billion. Similarly Government Domestic Debt has hit Rs 13.623 Trillion, comfortably surpassing Rs 20 Trillion marks and is slightly above 63 pct breaching FDRL’s 60 pct limit.

Government has shown its willingness on paper to bring it down, but this has only appeared in a media report, as there is no disclosure of plan or strategy that how they will reduce the number or what will be the source of income. Enlarging of GDP can be another source.

However, the key to reduce pace of DEBT growth is by sharply reducing Target Rate and Coupon of Government Paper.

This is one of the major factors, Global market is witnessing shift in Central Bank’s Monetary Policy Stance towards easing and now many countries are opting for NEGATIVE Interest Rate.

Similarly in Pakistan, where increase in Revenue Collection is unthinkable due to conflict of interest, Ministry of Finance should take a cue from global interest rate trend and sharply slash YIELD & COUPON rate to slowdown the pace of DEBT Growth and simultaneously reduce its funding cost or else nothing can stop debt growth. Though higher GDP may reduce in percentage terms, but size of funding will become impossible to manage.


Recently on print and electronic media there is lot of bashing going on against government, blaming it for fall remittances by nearly 20 pct.

Argument given on Print and Electronic is totally weak as it is without any supportive evidence. The fall in remittances is annual phenomena. Historical evidence will tell that prior and few days after EID Holidays, which is normally 10-days period on an average, remittances do take a dip, as sender get exhausted after sending Eid and Zakat money.

Following month remittances flow is back on track, whereas pressure once again mounts at the time of Eid ul Azha and the trend remains almost identical.

During this period there is surplus liquidity in the market due to purchase of sacrificial animal, which increase Currency in Circulation by roughly Rs 150 Billion and cash on hand is held for 1-2 months.

After two major holiday months, flow of Remittances gets back to normal for remaining next 8-9 months period.

However, I support IMF view on remittances, which is likely to remain from flat to mildly firm. Hypothetically based at 2.5 pct or 200.000 job losses in a year, which is unlikely scenario because construction business is hardest hit due to liquidity constrain. Pakistani labor is comparatively fewer in construction activity.

Hence, the country should still enjoy Remittances flow of nearly USD 20 Billion, unless there is major turmoil in M/E oil producing countries. Whereas, another key indicator is Global Remittances growth, which is likely to remain on the up by 2-3 pct. Last year despite fall in remittance in the region Pakistan enjoyed higher growth.

The Problem is that, in true sense there is Real Economic Problem, as our economic woes keep on piling up. Our Economic Guru’s are always quick to “Hit The Trick”, probably to gain extra mileage, but the sad reality is that our economic experts has never come up with a number based recipe for steady economic growth, so that they do not get exposed.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction). 

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