Finally, something has brought a smile to the face of Ishaq Dar, Pakistan beleaguered finance minister. A "yes" from the International Monetary Fund (IMF) for the release of new funds offers a respite for an economy still in recovery phase, and for a government facing political turmoil and public anger over poor energy management.
The IMF review had been pending since August, but did not take place until recently because the country had been rocked by protests against the 15-month-old Pakistan Muslim League (Nawaz) government. Mr Dar, meanwhile, has been grappling with the re-emergence of revolving debts that had cleared right after assuming the Finance portfolio in June last year.
Also having a negative impact on the economy was a major flood this year, which stunted the growth of the agriculture sector. As well, officials were disappointed by the postponement of a visit by Chinese President Xi Jinping, who has been dispensing largesse elsewhere in South Asia since taking office. Islamabad had been hoping to see a revival of the era of high foreign direct investment from China, similar to that of nearly a decade ago.
Meanwhile, the government's revenue targets are looking impossible to achieve. Significantly, it has suspended a plan to sell shares in state-owned Oil & Gas Development Co Ltd (OGDC), dealing a blow to a privatisation drive at the centre of efforts to revive the economy.
The government had aimed to earn about $800 million by selling a 7.5% stake in OGDC this month. However, pressure from unions opposed to the divestment, coupled with plunging world oil prices, have led to the postponement.
As well, the government is facing a challenge to the gas infrastructure development surcharge of 145 billion rupees from the government of the Khyber Pakhtunkhwa (formerly North-West Frontier province).
An energy shortfall — and a gas distribution system skewed toward the provinces producing it — has badly affected 70% of the textile industry in Punjab, resulting in a visible impact on exports, even though Pakistan enjoys GSP-Plus tariff break status for its textiles in the European Union.
The slide in the rupee is also hurting economic prospects, but officials see a ray of hope in the form of declining oil prices, while the political protests that had tied up Islamabad for months appear to be losing steam as well.
As well, the recent visit by Prime Minister Nawaz Sharif to Beijing has revived Chinese interest back to invest big-time in Pakistan. These developments led Mr Dar and his entourage to Dubai to renegotiate with the IMF mission. The good news is that the fund is likely to release two tranches of funds totalling $1.1 billion next month.
The fund's language was sympathetic: even though the government has missed some performance targets in the last two quarters, the IMF granted three waivers in September and two in June.
The targets are all interrelated, involving net domestic assets and government borrowing from the central bank, while in September, owing to a delay in privatisation proceeds, net international reserves slipped as well.
Nonetheless, the IMF mission was encouraged by the strong fiscal performance achieved in fiscal 2014 which ended on June 30. It also applauded the determination of authorities to bring the fiscal deficit down to 4.8% of GDP in fiscal 2015. There has already been a marked improvement in monetary assets — government borrowing from the banking system since the fiscal year began on July 1 is half (154 billion rupees) of what it was in the same period last year.
However, the improvements have not translated yet into a "crowding in" of private investment, as credit to the private sector is almost zero since July 1, compared with 31 billion rupees in the same period last year.
The good news is that there is finally room to start trimming Pakistan's high interest rates. With July-October inflation easing to 7.1% and the October figure at a 17-month low of 5.8%, the central bank on Nov 15 cut its policy rate from 10% to 9.5%, which could help jumpstart private lending.
Rates had been kept high to counter vulnerabilities in the balance of payments, but with the IMF's approval, falling oil prices (down nearly 30% from their peak) and the expectation of central bank reserves covering three months of imports, the government believes it can once more focus on growth and employment generation.
The IMF expects GDP growth of 4.3% against the government's target of 5.1% in fiscal 2015. The slippage is attributed to the floods, which washed away the potential of agriculture growth. However, an 8% upward revision in wheat support prices at a time of declining global prices could result in a bumper crop and enhance the growth.
Declining oil prices make heating oil and diesel more affordable, and can also make liquefied natural gas (LNG) imports economically viable. However, distribution losses remain a big problem in Pakistan. Increasing tariffs to bridge the gaps has proved counter-productive: despite a rise of 60% in tariffs, recovery rates have fallen by 4%, and curbing outright theft is difficult.
That is why, after the government cleared 500 billion rupees in debts incurred over 3-4 years, they have picked up at a much higher pace, to between 250 billion and 300 billion in the past 15 months. The reason is simple: the higher the rates, the higher the theft in value.
Nonetheless, the government may keep increasing gas tariffs in line with IMF conditions, and will have to comply with other structural benchmarks before the December review. These include legislation on the autonomy of the central bank, which is now pending in parliament.
Meanwhile, after the postponement of the OGDC share sale, the privatisation commission has to roll up its sleeves and push secondary offerings of two top-tier banks (ABL and HBL), three electricity distribution companies and Pakistan International Airlines (PIA).
The government also needs to come up with an alternative to the gas infrastructure development surcharge (or settle its dispute with the Khyber Pakhtunkhwa government) to meet its revenue targets. Failing these moves, the IMF may raise its eyebrows again.
