Sovereignty lies with IMF: The Final Act
The government has agreed to the terms with IMF. It has one month to get the parliament to approve them
― Prime Miniter Imran Khan
I don’t have anything to add anymore. Just sharing excerpts of the following items published in the press.
Bailout programme in the bag? - Opinion - Business Recorder (brecorder.com
IMF rejects borrowing request (tribune.com.pk
The much awaited staff-level agreement with the International Monetary Fund (IMF) on the sixth review was reached after virtual discussions during October 4-November 18, 2021 and noted on the Fund’s website early Monday morning on 22 November. Details of the time-bound quantitative conditions and structural reforms agreed with the Fund would be uploaded on the Fund website under the sixth review in due course - the timing of which is subject to “approval by the Executive Board, following the implementation of prior actions, notably on fiscal and institutional reforms.”
Put a pin on the bold part.
The IMF has rejected almost all major proposals of Pakistan for amendments to the SBP Act 1956, except for accepting the federal government’s right to appoint SBP board members and retaining finance secretary on the board.
However, the federal finance secretary, who would represent 96% of shareholding, would not have the right to vote on any issue, sources told The Express Tribune.
No borrowing from SBP, which is fine I guess.
The global lender turned down the government’s proposal to allow it to take loans equal to 2% of the gross domestic product (GDP) in a fiscal year. The IMF did not budge despite the government’s opinion that it was its constitutional right to take loans to finance its operations.
Although there is a ban on government borrowing from the SBP under the IMF programme till September 2022, the government has now given up and agreed to permanently close this door through legislation.
“The bank shall not extend any direct credit to or guarantee any obligations of the government, or any government-owned entity or any other public entity,” said a draft of the bill approved in March this year. This clause remains unchanged.
The bank shall not purchase securities issued by the government or any government-owned entity or any other public entity in the primary market. The bank may purchase such securities in the secondary market, according to the draft.
In the UK, the government sets the inflation target and BoE tries to achieve it. In the US, the Federal Reserve sets and then strives to achieve the target. The government of Pakistan was targeting the UK model, but the IMF didn't accept it.
Sources said that the IMF also did not accept a proposal that the federal government would give an inflation target to the central bank. The government had proposed that the target should be set by it and the central bank should achieve it under its primary objective of price stability.
Removal of SBP governor on misconduct without going through the court.
Another concession that the government got from the IMF was that it could remove the SBP governor on misconduct without recourse to the “court of law”. Earlier, the government had agreed that the governor could not be removed without an order by the court of law in case of misconduct.
I don't get the difference in this one. SBP to be consulted before any amendment is made into legislation related to SBP. Thus, parliament isn't sovereign over SBP.
A change has also been made in another clause related to future amendments to the SBP law with consent of the central bank. Now, prior consultation will be required before making such changes as against the earlier clause that “the bank shall be consulted ex ante on any proposed legislative act related to the bank”.
IMF approach is reasonable with respect to profit distribution
The IMF also did not agree to change the SBP profit distribution formula. The March 2021 amendment will remain intact.
“An amount equivalent to 20% of the distributable profit shall be credited to the general reserve account until the sum of the capital and general reserves equals 8% of the total monetary liabilities of the bank.”
The bank is short by about Rs500 billion compared to the threshold of 8% of total monetary liabilities, according to the sources.
“So much of the amount as may be determined by the board, following consultation with the bank’s external auditors, from time to time shall be transferred to the special reserves account created for any of its specific, identified liability, contingency or expected diminution in the value of assets.”
Though the SBP board will be deciding about the special reserves account, the finance secretary will not have the right to vote under the new understanding with the IMF.
NAB can hound SBP to get it to toe the government line
Unlike the previous proposal, it had been agreed that the National Accountability Bureau (NAB) law would also be applicable on the SBP, as it was applicable on the Prime Minister, said Tarin.
I think this last condition is where the government will strive for control over SBP. If there comes a time when the government is really upset with SBP for not following its dictates, NAB can be activated to get SBP to toe the government line.
Reportedly, the aforementioned can be passed with a simple majority in the parliament.
Though the government successfully passed 33 bills on 17 November, Wednesday, after reaching a ‘backdoor’ deal with its coalition partners, yet these two ‘prior action’ bills were not included perhaps because they have been rendered extremely controversial.
Now that the government has agreed to these terms with IMF, the next step is to get this approved by the parliament, most likely through another 'backdoor' deal with PML-Q and MQM.
Now to the delicious parts.
The policy rate hike was to please IMF
I hinted at it too in my first post on the topic that how come the IMF statement was uploaded so soon after the MPC meeting that was held on Friday. The BR editorial stated above that statement was uploaded on Monday, Nov 22. It may be Nov 22 in Pakistan, but in the western hemisphere where IMF HQ is located, it was still Sunday, November 21.
Excuse the stock market for not saluting the staff-level agreement with the IMF , subject to approval form its executive board of course, because it turns out that the whole wait was more about the interest rate than other ‘prior conditions’. Why else was the monetary policy committee meeting held a week ahead of time and the interest rate outlook more hawkish than the market’s upper-end expectations? And what led the Fund to paste the ‘good news’ on its website in the wee hours of Monday even though nothing had changed about the situation regarding the most contentious prior action - the SBP (State Bank of Pakistan) amendment bill - since before the interest rate announcement?
>Perhaps the Fund expects the momentum from the joint session to continue, just like the government, or **perhaps it’s been given some sort of ironclad commitment not yet disclosed to the public, like most other parts of the negotiations.**
Finance Ministry caving in after the bluster
Regardless, it’s very surprising that nobody has yet explained the implications of what the government is celebrating as a big victory for its own budget for the ongoing fiscal year. It was in late-June, after all, not long after Shaukat Tarin replaced Dr Hafeez Sheikh as the head of the finance ministry that the former abandoned the latter’s fiscal conservatism and just days later rolled out a pro-growth, expansionary budget that shocked everybody who had been working on reviving the Extended Fund Facility (EFF) with the IMF.
But the government, happy with the political dividends of the subsidy-laced budget, took Tarin for his word that he would bring the Fund round to his point of view. That, very clearly, has not happened. Instead the talks got stalled and one by one the finance ministry caved in, finally agreeing to take a hit equivalent to Rs800 billion from the ongoing fiscal’s budget, or 1.5 percent of GDP, just to secure the staff level agreement.
The government gets one month to get the fat lady to sing
Let’s not forget that the agreement is the first of two steps in reviving the programme and it’s all for nothing if the prior actions are not completed in time and the executive board does not like what it sees by end-December.
So the government has got itself a one-month window, at best, in which to rush a supplementary finance bill through the National Assembly, incorporate a four-rupee rise in the Petroleum Development Levy (PDL) every month, approve audit of Covid-related expenses and share details of beneficial ownership of vaccine providers, and also get the SBP amendment bill approved by parliament.
We are still not out of the woods, as the above list of items that government has to complete as “prior actions” isn’t a walk in the park.
That doesn’t leave the budget document looking quite the same, especially since FBR’s tax collection target has been increased by about Rs 300 billion to Rs 6.1 trillion, the Public Sector Development Program (PSDP) is being cut by Rs 200 billion (22 percent), and there will be another increase in the power tariff in the next few months, on top of the increase of Rs 3.63 per unit in two phases since February.
The shift from "growth to stability" is just PR. It is all being done to please IMF
To say all this is being done because of a necessary shift from growth to stability might make them look mature, responsible and all that at press conferences - provided everybody’s forgotten all the chest-thumping at the time of the budget - but it does not hide the fact that the government green-lighted the whole year’s fiscal policy based on the assumption that the new finance minister would be able to persuade the Fund to dilute its demands just because he thought it was the right thing to do. The budget is not a one-quarter policy document, after all, and the withdrawal of tax breaks, subsidies and concessionary lending already has industry up in arms. So much for political expectations that was clearly given priority at the time of the budget.
Let bygones be bygones, as stated by Shaukat Tarin a couple of days ago in a press conference. The government has agreed to the above with the IMF. Now the ball is in the court of our elected representatives to debate and approve it in the parliament.