September 25, 2020

IMF May Have Miscalculated The Risks Of Bailout Package

Former Finance Minister Dr. Hafeez A Pasha, said in an interview with The News that, although IMF accepted that the slippages on the fiscal front are a major threat to the $6 billion bailout program, they (IMF)have misjudged the country’s current account deficit situation and the total government budget (twin deficits). He said that the IMF board approved the bailout package based on these projections and if they are not as assumed, the massive changes in the financial policies will increase the inflation rate to 15%-16%, which is higher than what the IMF expected to be (13%).

The IMF took the FY 2018-19 as the base year for providing the bailout package but, according to Pasha, “the whole base has changed altogether making it more difficult for Pakistan to implement this IMF program in its first year from 2019-20.”

According to Pasha the deviations in the IMF projections are as follows:

–    The IMF projected FBR collections to be around Rs 4150 billion at the end of June 2019, Pasha says that the collections will not rise more than Rs 3842 billion.

–    The current account deficit was projected to be $13 billion for the FY 2018-29 but it was $13.5 billion.

–    The revenue to GDP ratio was initially projected to be at 15% by the IMF, which was later changed to 16.3%, while the IMF projected that the government would reduce its expenditures (fiscal adjustments) by 1.3% of GDP. However, according to Pasha, the revenue to GDP ratio will remain at 14% and the government would have to make fiscal adjustment of 2.3% to stay on course.

He said that “it has never happened in the history of Pakistan when fiscal adjustment of 2.3% of GDP is materialized in a single year.”

He said that the IMF has bound Pakistan to adopt a market-determined exchange rate and managing this would require a tight monetary policy. The fiscal adjustments and slippages might result in the reality being different from the projections and this might cause exchange rate overshooting, which can cause a rise in inflation.

He said that “the absence of majority by the ruling party in the upper house may hinder the adoption of legislation needed to achieve program objectives.”

Commenting on the upcoming FATF meeting in October, he said that, “a potential blacklisting by FATF could result in a freeze of capital inflows to Pakistan, jeopardizing the financing assurances under the program.”

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