Let me start with a fundamental question: Does the latest indication by the Adviser to the PM on finance, Shaukat Tarin, that Pakistan will have to complete “about five prior actions” before the next tranche, marks the completion of an explicit strategic shift by the IMF (International Monetary Fund) towards Pakistan’s implementation of the structural programmes or is it an outcome of temporal exigencies on both sides for world optics? As it has happened for the second time this year, the first occurred in April this year on the release of USD 500 million, it is safe to regard it as strategic shift rather than the latter.
In case these five prior actions or fewer than five or none are implemented by mid/end December, what will be the future of the programme and what trump cards does GOP have to continue playing on front foot in the T20 economy match remains to be seen. The rest of the article hypothesizes how and why this strategic shift by the IMF has evolved into the currently observed dynamics. This evolution can be gauged by the following two significant indicators: shift from back-loading to front-loading of reforms and from conditionalities to “prior actions”. IMF critics would regard it as a major intrusion into our economic, political and national sovereignty.
It will not be an exaggeration to state that Pakistan has been taking the IMF for a ride since 1990, (see Preparing for another IMF ride, July 2018, also same admitted implicitly by FM in July’21) using geo-political ‘trump’ cards and other pretexts such as infant democracy and legislative constraints to avoid hard core structural reforms. The programmes were entered for inter-temporal quantitative stabilization measures at the cost of inflation and depreciation of the currency.
Few structural reforms implemented in last 30 years (although all were 3-year time bound) can be easily counted on fingers and the remaining to be shelved as a justification for future borrowing from the IMF and other lenders. Subsidies, exemptions, tax expenditure and elite capture of institutions and economic policies more or less remain intact or have grown significantly in the last 30 years, including foreign debt. The above pretexts were used frequently in review and board meetings of the IMF to obtain ‘waivers’ on conditionalities with a symbolic commitment to implement them by next review meeting or by the end of time bound three-year programme.
Thus as our foreign currency debt and short-term payment obligations gradually moved up along with our increasing trust deficit with the IMF, it is easier now geo-politically and being in the Chinese camp, for the IMF to tie the noose around our neck in terms of a priori conditions before the release of next tranche and maybe for every tranche from now on. This also happened in case of release of funds in April this year. Additionally, in spite of limited access of the IMF to CPEC (China Pakistan Economic Corridor) ‘game changer’ agreements, it remains wary of using IMF dollars to pay off Chinese obligations as once the dollars are deposited in Pakistan’s account in NY, they are as fungible as PKR loans.
In the current lame-duck IMF programme that has theoretically life of another 12 months, for political mileage it may not be possible for GOP to extend this programme. Also due to political uncertainty surrounding this country, “prior actions” are the only effective tool available to the IMF to salvage any ‘structural’ reforms it can to save itself from embarrassment in front of its majority voting directors before mid/end-December. For the IMF proponents, this approach may be considered as a blessing in disguise and the only way to marginally reduce the back log of postponed structural reforms since last 30 years.
The rationale for shifting from back loading to front loading reforms by the IMF is partly technical and partly due to the experience IMF had with juvenile politics being played out since embarking on the road to democracy from early 1990s. For the uninformed reader it is useful to step back and understand the back-loaded vs front-loaded reforms.
As per research, “Front-loaded (fiscal) adjustments are defined as those where more than 50 percent of the total deficit reduction was achieved in the first half of the time period covered by the episode. Otherwise, the adjustment is considered a back-loaded one”.
Furthermore it states, “The results show that large and back-loaded fiscal adjustments have the highest likelihood of success. Fiscal consolidations based on expenditure cuts increase the probability of approaching and achieving fiscal sustainability but are insufficient to maintain it unless accompanied by revenue reforms.” In most of the programmes, IMF observed that revenue reforms were not only half-hearted but moved at a snail’s pace compared to quick expenditure cuts to meet the quantitative targets of the programme.
The programmes mostly started with the advent of a new government in office who adhered to it sincerely or by ‘fiscal engineering’ in the first two years. By the time programme ended, it was almost pre-election phase, and in current programme it has started too early. Consequently, the fiscal sustainability it achieved in the first 2 or 3 years is thrown to the wind to gain votes for winning the next election either by distributing goodies due to demand for pound of flesh from stakeholders and/or in shape of shelving the revenue reforms package.
The probability of implementing the programme in 2018 and now implementing all the 5 a priori actions of IMF can be gauged from the observation, “Adjustment episodes launched in countries where governments enjoy a parliamentary majority and do not face imminent elections, are found to be more successful.” Thus it is difficult to blame IMF for switching from back-loaded to front-loaded reforms as the first one of the above characteristics were not met by the PTI government and the second one is not met in implementing the a prior conditions.
I end the article also with a question. Is the indication by the Adviser, a prelude to the voluntary exit from the programme, along with the induction of a strong critic of the IMF in the government or making opposition a scapegoat for failure to meet “5 prior conditions” due to failure to pass the upcoming presentation of bills?
Copyright Business Recorder, 2021
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