May 10, 2019 (MLN): The recent shuffle in top official positions i.e. Ex-Finance Minister Mr. Asad Umar and Ex-Governor of the State Bank of Pakistan Mr. Tariq Bajwa, and the selection of their replacements from among the former World Bank and IMF officials, leaves a window open for analysts to comprehend the direction in which Pakistan’s economic policies and performance are potentially headed.

In their latest Economic Note on Pakistan, EFG Hermes has highlighted a pattern in the timing of this decision, which is coinciding with the IMF’s mission visit to the country to discuss the final details of the loan programme.

The research house sees these changes and their timing as “pointing towards a more assertive approach from the government to the long-awaited IMF programme, with a clear mandate to get the deal done.”

The note casts light on the masses’ speculations about the implementation of an Egypt-like IMF Programme given the new SBP Governor, Dr. Reza Baqir’s background as the IMF’s senior resident representative to Egypt over the past two years.

The general public is concerned that a front loaded IMF programme would lead to higher inflation in Pakistan.

Mr. Mohamed Abu Basha at EFG Hermes points out in his article that while a comparison with Egypt’s economy has its merits given the similarities between the two economies, he thinks that such a comparison overlooks the fact that the two economies’ starting point entering into the programme is different and an Egypt-like IMF model would not fit in Pakistan’s case.

“On the currency, we think Egypt had a much larger imbalance that warranted such a sharp adjustment; unlike Pakistan. On the fiscal side, again Egypt’s fiscal imbalances were much greater, and their resolution, especially when it comes to fuel subsides, entailed a harsher impact on inflation and consumer purchasing power than what to be expected in the case of Pakistan, in our view,” said the note.

Mr. Basha goes on to underline that Egypt entered the programme in a much worse situation when it comes to the FX market; a parallel market existed for three years before the programme, where the premium to the official rate kept widening as time passed and the interbank market dried up.

In the case of Pakistan, the imbalances in the external balance were relatively less severe, especially the fact that they were not driven by debt monetization (the latest increase in SBP’s lending to the gov’t is largely sterilized; hence, we are seeing stable money supply growth). Moreover, the expiry of key projects amongst phase one of CPEC have immediately driven a sharp correction in imports.

 “Nevertheless, Pakistan is facing its own challenges, namely that the country lacks the diversity of Egypt’s sources of FX income. Pakistan relies primarily on exports and remittances, while there is hardly a tourism sector, and FDI receipts have been historically low. Exports still maintain a dismal performance a year after the devaluation, a continuation of poor export performance over the past decade.”

Such limited diversity in sourcing foreign exchange means the focus of external adjustment in the short term will rest mainly on contracting imports in the absence of major quick competitive gains that the economy can reap to attract more foreign currency. This is especially the case considering the elevated external debt payments over the next two years.

Looking at the fiscal side, again, one can easily monitor a stark difference between the two countries.

EFG’s note draws attention to Egypt’s fiscal imbalances which were much wider at the time, with the primary deficit, excluding grants, hitting a peak of nearly 9% of GDP in 2013/14 and standing at 3.5% at the beginning of the programme.

Egypt had to deliver a 5.5pp of GDP fiscal consolidation to bring its primary balance into surplus, something that Pakistan clearly needs to do less to achieve.

Successive rounds of fuel subsidy cuts were one of the key measures adopted in the Egyptian IMF programme to narrow the fiscal gap; the fuel subsidy bill was more than halved in two and a half years, notwithstanding the sharp recovery in oil prices from 2016 lows.

Conclusively, Mr. Basha remarked that “a fiscal adjustment in Pakistan should: i) be smaller in magnitude; and ii) less inflationary. Pakistan’s fuel prices are already liberalized (though IMF might ask the government to be less flexible with adjusting sales taxes on fuel, pushing prices slightly higher). The increase in power prices, as part of the resolution to the circular debt, could stand at 25-30% which is far lower than in the case of Egypt, where energy prices have more than doubled in local currency terms.”

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