Talks with IMF in critical phase

Pakistan has entered into a little delayed fourth review of the $6.8bn programme with the International Monetary Fund. By August 18, it would be clear in which direction the talks with the fund staff have moved and if its executive board would extend a couple more waivers and disburse the $550m fifth tranche in the first week of September. One would wish the political drama created by minority parliamentary leader Imran Khan and non-representative Tahirul Qadri on the August 14 independence day to subside before the IMF staff returns to Washington. The political developments may have a bearing on the IMF talks concluding on August 18. The IMF decision would impact the perception of the credit rating agencies and set the direction of cooperation with multilateral creditors and investors at an investors conference scheduled by the USAID for the $14bn Diamer Bhasha dam in early October. The government and the IMF have been at odds over the kind of autonomy that is to be entrusted to the SBP On the technical front, the government team has to intelligently and rigorously apply the programme adjuster on the performance indicator of net international reserves (NIR) of the State Bank of Pakistan (SBP), and then seek a waiver on the failure to achieve the target by a small margin. But this is something where the government has been struggling all along since the programme was activated early last fiscal year, and the Fund has willingly granted waivers. The government and the IMF have been at odds over the kind of autonomy that is to be entrusted to the SBP. In this regard, the government was required to get the SBP Act amended by end-June 2014 to set price stability as the central bank’s primary objective, and strengthening its governance and internal control framework ‘in line with Fund staff advice’. While the delayed talks have helped the government meet another benchmark for appointment of a financial adviser for PIA’s restructuring and privatisation — a target that was missed for two previous consecutive quarters. Advertisements have already been issued seeking applications for financial and consultancy advisers for the two power distribution companies of Islamabad and Lahore. A recent move by the Pakistan Peoples Party to resist privatisation of state-owned entities that it itself approved for sale in its tenure would also need a delicate explanation. The overall benchmark for hiring three financial advisers for capital market transactions of three companies and strategic sales of another three by end-March 2014 are only partially met so far. But it has become quite clear by now that the completion of the process for selling 26pc shares of PIA to strategic investors by December 2014, as required under a structural benchmark, is out of question, as the hiring of a financial adviser is still not finalised yet. The adviser, on appointment, will take time to design the structure and get it cleared from the government before entering into the more troubled waters of dealing with resistance. The question being raised on the appointment of the transaction adviser and diverging views between the privatisation commission and the PIA management over privatisation and restructuring would be interesting events to unfold in the coming months. The government may have done the research work on restructuring and strengthening the National Electric Power Regulatory Authority, but the benchmark requirement to fill important positions of members and chairman (and expert positions down the line) would take a lot of time to complete because the regulatory and legal requirements are yet to be triggered. On top of that, while the government had committed to increase electricity tariff through Nepra by 4pc, it has so far struggled to initiate reforms for the improvement of the generation, transmission and distribution system and to control load shedding. In fact, the government is faced with a fresh challenge originating from Nepra, which, instead of increasing the tariff, has determined Rs1.04 per unit average reduction in consumer tariff for April. A perplexed political and bureaucratic leadership has tried to appeal against the decision, but the move was legally time barred and thrown out on the first day of public hearing by the regulator. The Lahore High Court has since issued binding directives to reduce the tariff as determined by the regulator, but the government has already allowed power companies to collect over Rs15bn since then. With ever increasing circular debt and piling up receivables, the government may have to impose a special surcharge through an ordinance during the course of talks with the IMF to overturn Nepra’s tariff determination and the LHC’s order to provide legal cover to bills already recovered and avoid tariff reduction in the future. But the increase in power tariff, promised for October after the reduction in load shedding, would now also depend on the outcome of the political situation in the country. The government’s honeymoon period seems to be over. Published in Dawn, Economic & Business, Aug 11th, 2014