According to Asian Development Bank's Country Director Werner Liepach, Pakistan needs nine billion dollars of cash aid to shield its economy from a crisis. The maximum amount the International Monetary Fund would possibly agree to give to Pakistan is between 5 and 5.5 billion dollars or an amount sufficient to top up the repayment due to the Fund of 3.7 billion dollars in 2013-2014. Yes, green light from the IMF would enable Pakistan to access programme loans from other multilateral and bilateral sources to the tune of two to three billion dollars.
The ADB Country Director also pertinently questioned the definition of a crisis. Maybe, he said, 'Pakistan is already in a crisis as its forex reserves can cover only two months of imports. Normally, they should cover over three months.' Well, nobody has a better picture of forex flows than the State Bank of Pakistan. If the central bank Governor does not see a crisis - as of now - and is hesitant to rush to Washington DC until June this year - then there is no crisis. Secondly, SBP just like the Fund wants Islamabad to undertake reforms to contain expenditure and enhance revenue. There is very little reform needed on the monetary side. Upfront conditionalities if imposed by the Fund would require some tough decisions by the political forces at the helm.
It is nigh impossible to reduce the fiscal deficit unless the basic economic policy framework undergoes a change. Depreciating value of the rupee and raising interest rates may buy the country some time to ease pressure on the balance of payments, however, they are not a remedy to reduce the bloating fiscal deficit. Similarly, a higher growth trajectory (of around six percent) on a sustainable basis is not possible without structural reforms. To start with, this involves changing the way of governance and adhering to some kind of fiscal discipline. Deciding on trade-offs after estimating the cost of populist measures to buy votes appears to be the main reason why Governor SBP is reluctant to initiate a programme when this country is in an election mode. According to Karl Marx, history repeats itself; first as tragedy, second as farce. As Deputy Governor Yasin Anwar has already seen one transition of government in Pakistan. His former boss, the then Governor, Shamshad Akhter, made futile attempts to impress upon the then President, Musharraf, the need to timely adjust the POL retail prices and raise electricity tariff to cover the cost of soaring international crude prices - an all time high of 140 dollars a barrel. General Musharraf feared that doing so would hurt the electoral prospects of PML (Q). As a result, the forex reserves plummeted from 16 to below 10 billion dollars in a matter of few months. One fears a repeat of that tragedy. Not initiating tough reforms at this stage may be politically convenient. However, the citizens of this hapless country expect its central bank to have the contingency plan in place in case a BoP crisis does erupt.
We do not know what prompted the ADB official to go public. Perhaps the IMF may also go public on its ties with Pakistan and state that the Fund is also not interested in a programme with Pakistan unless it undertakes reforms. If they do so; what will be the consequences? Pakistan will have to hunker down to contain the damage. It has done that in the past. Remember the US sanctions in 1998 after the nuclear test. Capital control and imposition of higher cash margins on import letters of credit became necessary to slowdown the drawdown of forex reserves. The importance of exchange companies got enhanced while the role of the big boys in the regular economy ie the banks got diminished. This will run contrary to what the Fund really wants ie enlargement of white economy and a crackdown on black economy.
Both PML (N) and PPP are confident of winning the forthcoming elections. No matter who wins - reforms are unavoidable. Pakistan had to opt out of the programme as it could not adhere to commitments on the fiscal side and not on the monetary side. Conversion of Generalised Sales Tax into a Value-Added mode; reducing the subsidy on electricity through enhancing recovery of bills plus a combination of tariff adjustment and improvement in operation of power transmission and distribution companies to contain line losses as well as improving the efficiency in Gencos plus reduction of losses of other government sector-managed business were commitments provided to the Fund by Islamabad to reduce the fiscal deficit from 7.5 to below 4.5 percent of GDP over a three-year period. Reduction of public sector losses involves handing over government-managed businesses to the private sector. Introduction of VAT was meant to obtain more documentation of the economy to improve the tax-to-GDP ratio. PML (N) reportedly has strong links to the retail sector. These businesspeople are opposed to documentation of their businesses, however, this right wing-leaning party has a much stronger record on privatisation. PPP, on the other hand, does not have much confidence in private sector and feels public sector can be better managed by the government. It is not willing to tax agriculture income and has also failed to introduce VAT since its coalition partners were not willing to support the move. Technocrats and experts on the economy have consistently failed to overcome the hesitancy on the part of their political leaders to see light and avoid living from crisis to crisis. Only after taking painful reforms can the country exploit its full potential. As far as SBP is concerned, a non-professional and politically convenient position on Monetary Policy and balance of payment (BoP) will have horrendous consequences. Pakistan's central bank can print rupees to make up for domestic slippages, but it cannot print dollars to foot the import bill. Last but not least. Our finance minister Saleem H. Mandviwalla seems to have mixed apples and oranges or two totally different things. Talking to a news agency on Thursday, he reportedly said that if the Parliament gave its approval to Tax Amnesty Scheme, the government would not need to go to the IMF. We believe that his remarks were unintentional utterances because he knows well that the funds or loans, of course in dollars, from the IMF are used to resolve BoP problems. A country's commitments to undertake policy actions are also aimed at restoring or creating access to support from other creditors and donors. How can any country meet such challenges through its domestic currency?
Monday, March 11, 2013
Pakistan: But we cannot print dollars
According to Asian Development Bank's Country Director Werner Liepach, Pakistan needs nine billion dollars of cash aid to shield its economy from a crisis. The maximum amount the International Monetary Fund would possibly agree to give to Pakistan is between 5 and 5.5 billion dollars or an amount sufficient to top up the repayment due to the Fund of 3.7 billion dollars in 2013-2014. Yes, green light from the IMF would enable Pakistan to access programme loans from other multilateral and bilateral sources to the tune of two to three billion dollars.
The ADB Country Director also pertinently questioned the definition of a crisis. Maybe, he said, 'Pakistan is already in a crisis as its forex reserves can cover only two months of imports. Normally, they should cover over three months.' Well, nobody has a better picture of forex flows than the State Bank of Pakistan. If the central bank Governor does not see a crisis - as of now - and is hesitant to rush to Washington DC until June this year - then there is no crisis. Secondly, SBP just like the Fund wants Islamabad to undertake reforms to contain expenditure and enhance revenue. There is very little reform needed on the monetary side. Upfront conditionalities if imposed by the Fund would require some tough decisions by the political forces at the helm.
It is nigh impossible to reduce the fiscal deficit unless the basic economic policy framework undergoes a change. Depreciating value of the rupee and raising interest rates may buy the country some time to ease pressure on the balance of payments, however, they are not a remedy to reduce the bloating fiscal deficit. Similarly, a higher growth trajectory (of around six percent) on a sustainable basis is not possible without structural reforms. To start with, this involves changing the way of governance and adhering to some kind of fiscal discipline. Deciding on trade-offs after estimating the cost of populist measures to buy votes appears to be the main reason why Governor SBP is reluctant to initiate a programme when this country is in an election mode. According to Karl Marx, history repeats itself; first as tragedy, second as farce. As Deputy Governor Yasin Anwar has already seen one transition of government in Pakistan. His former boss, the then Governor, Shamshad Akhter, made futile attempts to impress upon the then President, Musharraf, the need to timely adjust the POL retail prices and raise electricity tariff to cover the cost of soaring international crude prices - an all time high of 140 dollars a barrel. General Musharraf feared that doing so would hurt the electoral prospects of PML (Q). As a result, the forex reserves plummeted from 16 to below 10 billion dollars in a matter of few months. One fears a repeat of that tragedy. Not initiating tough reforms at this stage may be politically convenient. However, the citizens of this hapless country expect its central bank to have the contingency plan in place in case a BoP crisis does erupt.
We do not know what prompted the ADB official to go public. Perhaps the IMF may also go public on its ties with Pakistan and state that the Fund is also not interested in a programme with Pakistan unless it undertakes reforms. If they do so; what will be the consequences? Pakistan will have to hunker down to contain the damage. It has done that in the past. Remember the US sanctions in 1998 after the nuclear test. Capital control and imposition of higher cash margins on import letters of credit became necessary to slowdown the drawdown of forex reserves. The importance of exchange companies got enhanced while the role of the big boys in the regular economy ie the banks got diminished. This will run contrary to what the Fund really wants ie enlargement of white economy and a crackdown on black economy.
Both PML (N) and PPP are confident of winning the forthcoming elections. No matter who wins - reforms are unavoidable. Pakistan had to opt out of the programme as it could not adhere to commitments on the fiscal side and not on the monetary side. Conversion of Generalised Sales Tax into a Value-Added mode; reducing the subsidy on electricity through enhancing recovery of bills plus a combination of tariff adjustment and improvement in operation of power transmission and distribution companies to contain line losses as well as improving the efficiency in Gencos plus reduction of losses of other government sector-managed business were commitments provided to the Fund by Islamabad to reduce the fiscal deficit from 7.5 to below 4.5 percent of GDP over a three-year period. Reduction of public sector losses involves handing over government-managed businesses to the private sector. Introduction of VAT was meant to obtain more documentation of the economy to improve the tax-to-GDP ratio. PML (N) reportedly has strong links to the retail sector. These businesspeople are opposed to documentation of their businesses, however, this right wing-leaning party has a much stronger record on privatisation. PPP, on the other hand, does not have much confidence in private sector and feels public sector can be better managed by the government. It is not willing to tax agriculture income and has also failed to introduce VAT since its coalition partners were not willing to support the move. Technocrats and experts on the economy have consistently failed to overcome the hesitancy on the part of their political leaders to see light and avoid living from crisis to crisis. Only after taking painful reforms can the country exploit its full potential. As far as SBP is concerned, a non-professional and politically convenient position on Monetary Policy and balance of payment (BoP) will have horrendous consequences. Pakistan's central bank can print rupees to make up for domestic slippages, but it cannot print dollars to foot the import bill. Last but not least. Our finance minister Saleem H. Mandviwalla seems to have mixed apples and oranges or two totally different things. Talking to a news agency on Thursday, he reportedly said that if the Parliament gave its approval to Tax Amnesty Scheme, the government would not need to go to the IMF. We believe that his remarks were unintentional utterances because he knows well that the funds or loans, of course in dollars, from the IMF are used to resolve BoP problems. A country's commitments to undertake policy actions are also aimed at restoring or creating access to support from other creditors and donors. How can any country meet such challenges through its domestic currency?
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