- The visit did not revisit the EFF
An International Monetary Fund (IMF) staff mission led by its Mission Chief of Middle East and Central Asia, Ernesto Ramirez Rigo, visited Pakistan during 16-19 September 2019. Upon conclusion of the visit, a statement has been released by the Mission Chief, which basically highlights the economic successes reached since the beginning of the Extended Fund Facility (EFF) programme, and indicates some of the main challenges being faced by the economy.
The statement firstly comments on the exchange rate-related aspects as ‘The transition to a market-determined exchange rate has started to deliver positive results on the external balance, exchange rate volatility has diminished’. Having said that, exports have not increased in any significant way, although there was a drastic devaluation of the rupee against the dollar.
Imports indeed have come down, narrowing the current account deficit, but this also has led to reduction in import of investment-related machinery, and at other places their imports have increased the cost of production. Both of these developments have reduced the level of competitiveness of the overall exporting sector; diminishing prospects of increase in exports, and production for domestic consumption, and investment activity.
Hence, this leaves the sustainability in reduction in external account deficit on thin ice, and any shocks on account of the brewing oil crisis– at the back of many months of build-up in Middle East tensions– will likely reverse the narrowing of the external account gap; especially since the country is a net importer of oil.
Secondly, the statement points out that ‘…SBP has improved its foreign exchange buffers’. Such optimism and celebration on account of the build-up of foreign exchange reserves is a short-sighted statement given the weak and artificial base that holds the increase in foreign exchange reserves. This is because a) the build-up is on account of help from some of those countries with which Pakistan has strong relations, and the initial tranche from IMF, and b) the steep devaluation has exacerbated the external debt repayments, a significant amount of which are due in the near-term, and without increase in exports, and a possible enhancement in import payments due to a likely oil crisis, overall means that the build-up in foreign exchange reserves may not be that strong a base for the economy to take strength from, as is being highlighted by IMF.
Hopes that the visiting mission of IMF wold revisit some of the important directions earlier taken in the programme with regard to the policy instruments, especially in the light of rising external risks– mainly the slowing global economy and a brewing oil crisis– have been dashed with the statement; including the related comments made during the visit
With regard to monetary policy and its impact on controlling inflation, the statement indicates ‘monetary policy is helping to control inflation’. The main policy instrument of monetary policy in the shape of policy rate has been consistently increased since January 2018, when it was 6 per cent. Since then it has been increased nine times, and in the most recent monetary policy statement– which State Bank of Pakistan (SBP) released on September 16– the policy rate was retained at 13.25 per cent.
In fact, the tight monetary policy carried out by SBP for many months now is the most severe in Asia; not to mention the otherwise general trend in the world of moving towards a more loose monetary stance, giving in turn greater space to fiscal policy and stronger regulation of markets; a policy direction which should have suited a developing country like Pakistan, with the existence of a high level of market failures and transaction costs, along with low level of financialisation and a small mortgage market overall, which meant that inflation was at least equally a fiscal phenomenon.
Hence, as expected, even a prolonged exercise of tight monetary policy, at the back of ignoring many months of data indicating a non-negative relationship between policy rate and CPI (consumer price index) inflation, has not been to reduce inflation in any significant and sustained way; where the most recent monthly data on CPI inflation for August 2019 indicated that it stood in the double digits at 11.6 per cent. This is also after the base effect in calculation of CPI inflation brought in a smaller number than would have been had the base not been changed for calculating the August inflation rate; where even then CPI inflation had increased from July’s year-on-year rate of 10.3 per cent!
What this high policy rate has done in the meanwhile is to a) come hard on the people in terms of ‘inflation tax’, especially when around one-third of the population lives below the poverty line, b) increase the cost of capital drastically, not allowing in turn domestic production to increase and has hurt the competitiveness of the exports sector, overall affecting in keeping the economy reeling and as corroborated by this excerpt from the statement: ‘The near-term macroeconomic outlook is broadly unchanged from the time of the programme approval, with growth projected at 2.4 per cent in FY2019/20’, and c) drastically enhance the already high domestic debt payments for the government.
Moreover, the statement indicates in terms of future outlook that ‘inflation [is] expected to decline in the coming months’, which appears highly unlikely given a) the imported inflation channel of highly devalued exchange rate, b) high policy rate will enhance the cost of production, which will feed into prices of goods and services, and c) a fast brewing oil crisis adding to the landed price of oil- given also that policy has not shown any inclination to be cut down on the component of indirect taxes/levies/margins in the landed price of oil- would lead to higher level of inflation.
Hence, the programme and the assessment of this statement, leaves the economy a) without correct appreciation of external risks, b) with the futility of policy prescription with regard to the two main policy instruments as they have been over-utilised even when the contradicting evidence is clear to be seen, and c) into a very uncertain future, which lacks policy that can actually bring stability to whatever small gains that have been achieved and a lot more that should be attained to take it out of the crises of a) twin-deficits, b) stagflation, and c) of being stuck in a low-growth equilibrium syndrome.
Hopes that the visiting mission of IMF wold revisit some of the important directions earlier taken in the programme with regard to the policy instruments, especially in the light of rising external risks– mainly the slowing global economy and a brewing oil crisis– have been dashed with the statement; including the related comments made during the visit.