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Photo Source: The Nation

Pakistan Reader# 254, 6 December 2021

Mini budget, IMF and a contemporary puzzle.



Pakistan has agreed to various conditions of IMF for continuation of a loan of USD 4.268 billion only while avoiding further Chinese loans

Ankit Singh

Following the staff level agreement with IMF on November 22 last month, the advisor to the PM on finance and revenue Shaukat Tarin announced the government’s intention to bring a supplementary budget, the mini-budget some say is a legislative adjustment for the commitments to be fulfilled for continuation of IMF loan program. Mini-budget is a tradeoff tool in the microeconomic annual commerce and trade actions, there is reduction and increase in duty on combination of goods. The State Bank of Pakistan (SBP) had in recent weeks increased benchmark interest rate by 150 basis points to control inflation, limit consumer credit and trade deficit, there has been an upward movement of price of goods and energy in Pakistan. The depreciating currency and its new higher average in the range of PKR 170-180 per dollar has also induced a pass-through movement in the general prices. What explains this price parity rational and IMF dictated macro-micro shift?

What are the tradeoffs in this mini-budget?
The current political dispensation in Pakistan had brought a similar supplementary budget in January 2019 which tried to induce spending, reduced tax rates for low-income groups and changing external perception of the country. This time the only difference is the government is trying to cool down overheated economy, to curb expensive imports, to reduce development expenditures and reduction in tax exemptions.

The IMF post the beginning of latest round of discussion to restart the loan program had wanted increased revenue figures for healthy fiscal situation, autonomy to the governor of Pakistan, privatization of state-owned enterprises and exchange rate flexibility. The details available at the time of writing of this article comprises adjustments worth PKR 600 billion, which comes around USD 3.6 billion in fiscal adjustment and expenditure cuts. There is huge increase in valuation rates of real estate sector and curb on import of non-essential items. All of this is primarily aimed at creating a favourable and positive economic scenario, chanellise the domestic demand for stability and to further facilitate the release of loans from other multilateral institutions. LNG prices and electricity price per unit have also recorded huge increase, so the way the situation is being assessed by the government is from a vantage point of neutralize the debt from the government while passing on the weight to the common man in Pakistan.

The IMF is the new imperial power in Pakistan?
Ishaq Dar, finance minister in the previous tenure of PML (N) in his article on SBP autonomy has termed the Pakistan as outpost of IMF. He has complained that the country is literally at the cusp of compromising its economic sovereignty by limiting the SBP governor to provide an annual report to parliament and nullified role of state in exchange rate, interest rate governance and more market-oriented economy. In a religious perspective, Islam requires the state to play a paternal role in financial and monetary operations and this gradual sliding to the Western monetary paradigm can be subject another round of public protests in Pakistan but there is a lack of awareness around economic matters. 

An important reason to trace this give in Pakistani authorities to IMF can be the soft investment coming from Western countries, however minimal. The Chinese projects in Pakistan are majorly hard infrastructure, which cannot do any profiteering unless there is simultaneous growth in income and consumption of population. That is where Pakistan now eyes the west backed institutions for their technological and financial investments for many reasons unspecified. 

Another instance to prove the point that Pakistan is now drifting to Western umbrella is the agreement signed with International Islamic Trade Finance Corporation (ITFC) for the import of crude oil, refined petroleum products and LNG, it can get cheaper loans from China or consortium of Banks not based in Saudi Arabia but rather Pakistan is buying oil from expensive loans, indicating an overtone on accessing such expensive loans.

The inflation in Pakistan is at double digit rate and there is no scope of any relaxation in near future as per the predictions, the double-digit inflation growth in recent was observed in 2008 when inflation had reached 20. 29 per cent and eventually Pakistan resorted to IMF bailout package worth USD 7.8 billion. The conditions were similar as the country had switched to civilian government which brought investors and accountability, similarly soon after final approval of IMF loan program will unlock various loan programs with various financial institutions aimed at stablising fiscal deficit, currency rate and access to capital for boosting exports by gradually helping manufacturing sector.

For any country geographically placed in global south, the development has not come from market investments alone, they need to develop resilient micro industries to cater innovation and development and finding their own space/brand in liberal market economy. It is part of a larger research whether Pakistan specific macro trajectories are positively associated with loan dispensation and favourable market economy. But for now, it is clear that giving up autonomy of SBP, reducing fiscal deficit, the government is prioritising overall trade perception of Pakistan which can be helpful if the export and import basket of Pakistan is diversified. This is where the puzzle becomes relevant, China Pakistan Economic Corridor (CPEC) has created a basket of loans from Chinese side as well, yet China is not the largest loan contributor. This explains that Pakistan knows its geopolitical relevance whereby China has got another safe corridor for its supplies but is not ready to go ahead for further engagement owing to previous Chinese loans and their abysmal repayment performances and that is where the West can become useful. The puzzle is not all bad for Pakistan, the country is treading a path of complex interdependence vis a vis both China and USA led west, as Moid Yusuf terms that Pakistan want to become a domain of cooperation in geoeconomics rather than a domain of conflict in geopolitics between the Chinese version of world order and Western world order and hence maximizing from both the sides.

References
Pakistan, IMF reach staff-level agreement on steps for revival of package,” Dawn, 22 November 2021
No increase in taxes in mini-budget, some exemptions to be withdrawn: Shaukat Tarin,” Dawn, 26 November 2021
Mohammad Ishaq Dar, “The New SBP Bill: When Central Bank Autonomy Goes So Far That It Challenges State Sovereignty,” The Friday Times, 15 November 2021
Pakistan Inflation Rate 1960-2021,” Macrotrends
Finalized ‘mini-budget’ comprises adjustments worth Rs600bn,” The Correspondent PK, 03 December 2021
Iftikhar A. Khan “Focus shifting from geopolitics to geoeconomics, says FO,” Dawn, 03 April 2021

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