Two questions come to mind. First, what were the gains made during the September 2013-September 2016 EFF? And has the situation changed dramatically during the past seven months, post-EFF, that would justify the caveats? There are three outstanding and need one add extremely disturbing elements that steadily worsened during the EFF and continue to do so till today.
The first relates to the worsening current account deficit. Exports have been steadily declining since 2014 and declined from 25 billion dollars in 2014 to 21.9 billion dollars in 2016 and have been declining each month since then. Imports on the other hand were estimated at 40.36 billion dollars during July-June 2013 (with petroleum products accounting for 14 billion dollars due to rise in international oil prices) and rose to 40.45 billion dollars in the comparable period of 2016 (with petroleum products accounting for only 8.35 billion dollars due to a dramatic decline in the international price). The decline in value terms in imports of oil and products between the two years was a whopping 5.65 billion dollars.
The biggest import rise in monetary terms in 2016 was accounted for by an increase in power generating machinery - from 511.9 million dollars in 2013 to one billion dollars in 2016 - a rise of 489 million dollars. Additionally, the rise in imports of power generating machinery would not lend a comfort level to the general public these days given the ongoing load shedding and the recent reports by government departments including National Transmission and Despatch Company (NTDC), administratively under the control of the Water and Power Ministry that reflect continued poor performance of the sector. Machinery imports per se rose from around 4 billion dollars in 2013 to 6.2 billion dollars in 2016 or a rise of 2.2 billion dollars between 2013 and 2016, transport vehicle imports rose by 155 million dollars during the two years - and the two combined is 38 percent, or not even half of the decline in imports due to petroleum products.
The oft cited reason for declining exports and rising imports (other than petroleum products) is (i) an overvalued rupee and (ii) rising refunds that led to borrowing from the banking sector which raised their costs of production making them uncompetitive in foreign markets. The IMF, during the duration of the EFF when it had considerable leverage, did make mention of the overvalued rupee and made some half hearted attempts to convince finance minister Ishaq Dar to allow the real effective exchange rate to prevail (which was critical if Pakistani exports were to be able to compete internationally especially given the depreciation of currencies of those countries with which our exporters compete), but to no avail. Instead the Fund staff focused on a time-bound reduction in the budget deficit, evidently unconcerned with the resulting escalating reliance on external borrowing, directly from multilaterals and/or issue of Eurobonds/sukuk at rates well above the market rate. The mission leader though did acknowledge in a press conference that the country's rising foreign exchange reserves were largely from borrowing.
Secondly, the energy sector's performance has not improved and claims to the contrary are easily dismissed given the recent rise in unscheduled load shedding. The Minister for Water and Power Khwaja Asif explained the reasons behind the demand-supply gap of 7000MW (according to a Business Recorder report that was not refuted though the Minister claimed 5000MW shortfall in the National Assembly last week) - a level comparable to what was evident during the tenure of the PPP- led coalition government: higher temperatures on the plains sooner than in previous years, slow snow melt in mountains like in previous years leading to hydel generation well below capacity.
The Prime Minister reportedly expressed displeasure at the Ministry's failure to take account of these two factors - a displeasure that prompted no response from the Ministry though Khwaja Asif has been at pains to take on everyone else who has dared to challenge his claims about a marked improvement in the sector's performance: (i) NTDC in a recent report expressed concerns over the sector's poor performance - a report which was cited by the German bank KfW prompting it to conclude that the claims by the Ministry of a marked improvement are 'political' which in turn energised Minister Asif to insist on an apology which was tendered; however KfW added that it was meant to be an internal document and should not have been leaked; (ii) the performance evaluation report of the regulator Nepra based on quarterly reports submitted by the state run generation companies; (iii) the Independent Power Producers (IPPs), the main source of power generation today, invoked sovereign guarantees and the IPP's Advisory Council issued advertisements detailing their woes with the Ministry leading to Khwaja Asif's ire; and (iv) the media for bringing unscheduled load shedding to the notice of the public though one doubts if the public can ever be unaware of the extent of load shedding. In this context the Fund during the three years of the EFF simply insisted on a do-more mantra which effectively implied raising the power tariff, though actual billing was less with the decline in the international price of oil.
Finally, there has been a marked failure in reforming the tax structure and its administration. The inordinate focus of the Fund staff and the government was on total revenue collections instead of on rendering the tax structure equitable, fair and non-anomalous which accounts for heavier taxes on existing tax payers' - a situation that the IMF together with the government must be held accountable for. And additionally, as in the past the Finance Minister opted to reduce the development as opposed to current expenditure to meet the requirement of slashing the budget deficit at the cost of growth. Perhaps this was one of the reasons that prompted the Finance Minister to overstate growth rate.
To conclude, the IMF's conditions and its monitoring of the EFF leave a lot to be desired and one would hope that next time around, a time that economists are agreed would be soon after the general elections 2018, a more informed team both from the IMF and the government side negotiates the terms of the deal.