Inflation to be more than what IMF projects, says ex-minister

VIAMehtab Haider

ISLAMABAD: Amid IMF’s acceptance as slippages on fiscal front as major risk to the new $6 billion programme, former finance minister Dr Hafeez A Pasha pointed out some glaring mistakes in the projections of twin deficits made by the IMF for approving bailout package for Pakistan.

Talking to The News on Tuesday, renowned economist Dr Hafeez A Pasha warned that with massive adjustments on fiscal and external account fronts might result into hiking average inflation to 15-16 percent against IMF’s projected inflation of 13 percent at peak in the ongoing fiscal year.

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He said that the IMF projected inflation at 13 percent in current fiscal year but indicated that it would be downslide to 11 percent by end of June 2020. However, he said that with administrative hike in utility prices and impact of other steps possessed potential of rising inflationary pressure from existing level of 9 percent to witness 18-20 percent till end December 2019. Then on average the inflation might remain around 15-16 percent in the current fiscal year, he maintained.

He said that the IMF took last financial year 2018-19 as base year for approving $6 billion package for Pakistan under 39 months Extended Fund Facility (EFF). “The whole base have changed altogether making it more difficult for Pakistan to implement this IMF program in its first year from 2019-20,” he added.

He said that the IMF projected budget deficit at 7.1 percent of GDP for 2018-19 while it was climbing over 8 percent of GDP and might touch 8.4 percent till finalization of fiscal accounts.

The IMF projected FBR collection at Rs 4150 billion for end June 2019 but it might remain flat at Rs 3842 billion for the fiscal year 2018-19. The revenue to GDP ratio, according to IMF estimates, stood at 15 percent of GDP and it was envisaged to go up to 16.3 percent of GDP in current fiscal year, he said and added that the envisaged fiscal adjustment of 1.3 percent of GDP was projected by the IMF staff. However, he said that the revenue to GDP ratio might remain at 14 percent so the government would have to make fiscal adjustment of 2.3 percent of GDP to keep its fiscal projection intact.

“It has never happened in history of Pakistan when fiscal adjustment of 2.3 percent of GDP is materialized in single year” he added.

On external account, Dr Pasha said that the current account deficit was projected at $13 billion for fiscal year 2018-19 but the official data showed that it might be hovering around $13.5 billion for the last fiscal year that had just ended on June 30, 2019. Now the IMF has projected that the current account deficit would be reduced by half and would be slashed down to $6.7 billion by end of the ongoing financial year.

He said that the IMF has bound Pakistani authorities to remove administrative tools such as condition of cash margins and fiscal measures such as abolishing of regulatory duties so only option would be left for curtailing current account deficit would remain using exchange rate. However, he refused to predict any figure on exchange rate front.

The IMF staff report itself conceded that notwithstanding the safeguards included in the design and financing of the program, the risks to the program are particularly high. Managing successfully the transition to a market determined exchange rate will be crucial to ensure popular support for the program. In this respect, failure to maintain an adequately tight monetary policy could lead to exchange rate overshooting and second-round effects on inflation. Fiscal slippages and resistance to some of the fiscal measures could undermine the program’s fiscal consolidation strategy, thus putting debt sustainability at risk. Progress in governance and institutional building may be opposed by vested interests, weakening structural reforms and medium-term growth prospects.

“Moreover, the absence of a majority by the ruling party in the upper house may hinder the adoption of legislation needed to achieve program objectives” says the IMF. Also, there is a risk that provinces may under deliver on their commitments to budget parameters and relevant objectives over the program period. The large amount of short-term debt implies significant rollover needs in the near-term.

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“Finally, a potential blacklisting by FATF could result in a freeze of capital inflows to Pakistan, jeopardizing the financing assurances under the program” the IMF pointed out. These risks are mitigated by (i) the upfront adoption of key policy measures, especially on greater exchange rate flexibility; (ii) securing formal and public agreements with the provinces on the overall fiscal strategy, including procedures to address deviations; (iii) prudent phasing of purchases; (iv) increasing social spending to protect the most vulnerable from the impact of reforms and garner support for these measures; and (v) strong commitments of support from the World Bank, ADB, and key bilateral partners and conservative assumptions on private financing flows. Other risks, including those related to domestic security conditions, global trade, growth in major trading partners, oil prices, and tighter global financial conditions, could exacerbate these challenges, the IMF concluded.

(This news/article originally appeared in The News on July 11th, 2019)

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