ON the cusp of the International Monetary Fund (IMF) review, Pakistan apparently stands tall, exceeding its primary economic targets for the July-September quarter. Scheduled for Nov 2, the first assessment of the short-term, $3 billion loan deal will look into Pakistan’s progress so far.

Going by the looks of it, the caretaker government — lauded for achieving most of the targets — seems on track to unlock a $710 million loan tranche this December.

Yet, the path ahead won’t be without its share of obstacles, as the IMF review team is expected to propose some more — and potentially unpopular — targets for the ongoing quarter (October-December).

At the same time, the role played by an “invisible hand” in righting some of the wrongs can’t be ruled out, and the caretakers might need to explain how they reached their goals.

The caretakers have received their share of praise, but an ‘invisible hand’ and its ‘magic wand’ are also at play

The results shared by the finance ministry paint an optimistic picture. With a fiscal deficit of just 0.9 per cent of GDP in July-September — a subtle yet significant dip from last year’s 1pc — the country seems to be making the right economic strides.

This success helped achieve another target: a primary surplus of Rs417bn, exceeding the IMF’s requirements.

Background conversations with officials from the finance, revenue and energy divisions suggest that all stakeholders are pleased with the results and are confident ahead of the impending review.

Political ramifications

However, some economic experts are sceptical about the sustainability of these outcomes.

Delving deeper, these experts see two primary contributors that helped achieve the fis­cal deficit target: significant cash surplu­ses from Balochistan and Sindh and a stagge­ring increase in the petroleum development levy during the July-September quarter.

Other fiscal adjustments include substantial cuts in federal subsidies and developmental spending.

The experts say that these achievements might please the IMF, but they will have political ramifications.

The surge in the petroleum levy will directly impact provincial finances from the federal divisible pool, whereas the introduction of higher fixed monthly charges on gas bills challenges the spirit of federal devolution. These measures will possibly generate billions for the federal government at potential political costs.

However, political parties, particularly PPP, the main architect of provincial autonomy, have remained silent on these developments.

Regional fiscal dynamics also warrant att­en­tion. When the Pakistan Democratic Mo­­v­e­­ment (PDM)-led government was in power, the finance ministers of Punjab and Khyber Pakhtunkhwa aired concerns about achieving cash surpluses under the IMF pact.

The top leaders of the PDM and the PPP — which was part of the coalition government but not the multi-party alliance — publicly stated that cases should be filed against those finance ministers for making such statements.

However, in the July-September quarter, Pun­jab overshot its expenses by Rs28.6bn and KP by Rs10.31bn, while Baloch­is­­tan and Sindh maintained commendable cash surpluses.

Such fiscal inconsistencies amidst imminent elections raise eyebrows, hinting at possible political manoeuvrings. The silence of the beneficiaries on these strange happenings is deafening.

Circular debt, tax revenue

Another key challenge was to keep the circular debt below the limit agreed with the IMF. In July-September, it reached Rs2.54bn, which was within the limit. The overall circular debt is expected to drop further during this quarter.

Besides, there were no supplemental grants in the first quarter, and the government’s salary bill increased at a rate lower than inflation. Meeting these targets demonstrates that the finance and energy ministries will be mainly satisfied with their performance. In terms of targets, both the Ministry of Climate Chan­­ge and the BISP social safety net are on track.

On the revenue side, the government achieved both tax and non-tax targets.

The July-September quarter saw the total revenue at Rs2.68tr, or 2.5pc of GDP. Of this, the tax revenue was Rs2.21tr (2.1pc of GDP), a slight improvement from Rs1.78tr (2.1pc) a year ago. The non-tax revenue was Rs468.81bn (0.4pc of GDP) in the first quarter compared to Rs234.9bn (0.3pc) a year ago.

The FBR also surpassed its revenue target of Rs1.98tr, collecting Rs2.04tr in the first quarter. Similarly, the refund pending ceiling has been reduced from Rs247bn to Rs198.5bn.

All structural goals were also met, including no tax amnesty, preferential tax treatment or exemptions, a reduction in the processing time for imports and exports to 52.8 hours from 98 hours, and letting banks access civil workers’ asset declarations. The FBR is confident that the IMF review will go well as far as the tax collection is concerned.

The impending monetary policy review by the central bank is also expected to affirm compliance with the IMF’s conditions. The SBP has also expressed confidence in meeting all other IMF conditions, including the forward book target, net international reserves, and net domestic assets.

‘Invisible hand’

Amid all these visible achievements, there is a palpable sense of an “invisible hand” emerging as a pivotal force in shaping the country’s current fiscal landscape.

The phrase was coined by the 18th-century economist Adam Smith to describe how unforeseeable factors affect markets.

In Pakistan’s context, however, the metaphor alludes to unseen powers steering the economic ship.

The recent clampdown on exchange rate manipulators and illicit trades underscores this influence, with the rupee stabilising to around Rs277 per dollar from a peak of Rs335 in September. This immediately brought some relief, particularly a large drop in fuel prices.

To ensure the continuity of these fiscal successes, policymakers face the challenge of keeping an eye on cash repositories like bank lockers, which are estimated to have about $10bn. In Pakistan, there is no law requiring locker holders to declare their assets stored there. The policymakers also contemplate phasing out the Rs5,000 banknote.

But taking all these measures will not be a walk in the park, something also true on a larger scale when it comes to fixing the entire economy.

So, will the “invisible hand” wave its magic wand again?

Published in Dawn, October 29th, 2023