While economic managers of Pakistan are outwardly showing a great deal of confidence in the country's solvency and propagating the myth that there was absolutely no need to worry on this account, they seem to be acting on a different game plan in their offices and for the right reasons.
According to newspaper reports and background discussions with the people involved, the government has already held several rounds of talks with the IMF on a new loan arrangement and the matter was further discussed in Washington this week between the IMF and the Pakistani delegation led by Finance Minister Dr Hafeez Sheikh that had arrived in the US capital to attend the spring meetings.
A member of the delegation is reported to have stated that "we would like to have a new arrangement as soon as possible". Obviously, authorities of the country seem to have decided to seek a new financial arrangement with the IMF amid concerns that it may not be able to repay its foreign debt in the next financial year without external support. It may be recalled that Pakistan is required to repay the $7.6 billion loan it had received from the IMF under a Stand-By Arrangement signed in 2008 and the country would need $4.3 billion next year just to pay the amount due on this loan. A recent IMF report on Pakistan's economy has noted that the country's gross financing requirements in the next fiscal would be $10.5 billion, while its ability to repay loans would weaken significantly during 2012-13.
In their meetings with the Pakistani delegation, the IMF officials highlighted rising commodity prices, surge in the oil import bill and the upcoming deadlines on repayments as negative factors impacting the external sector of the economy. All these factors would combine to reduce the country's foreign exchange reserves. According to news reports, the Pakistani team was interested in a new arrangement with the IMF of dollar 3.5 billion to dollar 5 billion while IMF officials are believed to have reminded the delegation of the country's "spotty record" in implementing the previous programme.
Whether Pakistan would actually be able to negotiate another programme with the IMF would depend mainly on the country's willingness to agree and adopt a tough reform agenda in accordance with the dictates of the Fund's Executive Board dominated largely by the developed countries. Reports suggest that the lending agency was unhappy with Islamabad's response to the proposed economic reforms, particularly for the lowering of the fiscal deficit and improving the tax-to-GDP ratio. Learning from the past, IMF's attitude this time could also be more firm, with most of the conditionalities, thrust down the country's throat upfront so that there was hardly any possibility for backtracking. Another important factor behind such a rigid posture of the IMF could be the less than sympathetic attitude of the developed countries, specially the US, at this particular point in time. Our previous behaviour in violating conditionalities frequently and seeking waivers in the past would also complicate the matter. However, despite these odds, Pakistani authorities should continue to strive seriously for an understanding with the IMF in order to negotiate a loan programme in a reasonable time period but certainly before our foreign exchange reserve position becomes uncomfortable, raising concerns about the country's ability to meet its foreign obligations.
We say this because certain negative developments on the external sector like decline in exports, high oil prices in the international market, decline in foreign investment and bilateral inflows and heavy upcoming repayments have the potential to cause serious damage to the external sector position of the country in the near future and reduce our foreign exchange reserves to low levels. Besides, international financial institutions still have confidence in Pakistan's economy, as reflected in the $1.8 billion loan approved recently by the World Bank. However, if Pakistan is not on the same page with the IMF with regard to the economic policies of the country for a considerable length of time and a programme is not in place despite our request, other multilateral financial institutions and bilateral investors would also tend to avoid the country.
The most positive outcome of concluding an agreement with the IMF at this point in time would undoubtedly be the lessening of pressure on the economic team to provide all kinds of fiscal concessions in the next budget and borrow excessively from the banking system which could unleash high inflationary pressures and destabilise the economy in a number of ways. Of course, the political government of the country would like to go to any extent to win the upcoming election and the IMF conditionalities could be the only roadblock to check the government's ambitions and follow a responsible fiscal strategy. It is very sad to see that we are unable to adopt and adhere to sensible economic policies without some kind of coercion from outside but that is an undeniable reality. Taking all the factors in view, we feel that if the reports of negotiations for another programme with the IMF are true, such a step would be in the country's best interest and the relevant authorities need to be encouraged to expedite the process.
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