Approval of PRGF's eighth tranche

Pakistan, once dubbed a single tranche country, has come a long way in sustaining a satisfactory relationship with the IMF. Its three-year Poverty Reduction and Growth Facility (PRGF) arrangement was approved on December 6, 2001 and about two-thirds of the total amount approved (SDR 1.034 billion) has been disbursed so far according to the schedule.
On Wednesday, 23rd June 2004, the IMF Board of Directors approved the release of PRGF's eighth tranche amounting to SDR 172.3 million and it would be second last release before the termination of the facility in December 2004.
As the last review mission, which had discussed the economic data of the country up to March 2004 with the authorities was largely satisfied with the performance of the economy, the approval of the latest tranche was, more or less, expected without any major hindrance.
However, in completing the review, the Executive Board of the Fund had also to approve Pakistan's request for waivers for the non-observance of certain structural performance criteria and for the modification of one of the end-June, 2004 quantitative performance criteria.
The Fund's Executive Board was quite appreciative of the recent performance of the economy. According to the Deputy Managing Director, during the first nine months of 2003-04, GDP growth accelerated further, inflation remained within target and significant surplus in the external balance was achieved.
In addition, fiscal deficit was lower than expected and poverty related expenditures grew by 28 percent over the same period last year.
Structural reforms were further advanced and energy prices and tariffs were adjusted in line with the international prices.
The macro-economic policy framework for 2004-05 was also broadly appropriate. Fiscal policy aims to further increase poverty-related expenditures while reducing the public debt burden.
Monetary policy will continue to be geared towards reining in inflationary pressures and the exchange rate will continue to be managed flexibly. Besides, the early repayment of some relatively expensive external debt was commendable.
The IMF, taking advantage of the occasion, also chose to offer some advice. In order to maintain or accelerate the current growth momentum and make progress on poverty reduction, authorities of the country would need to steadfastly pursue their reform agenda to improve the environment for private sector investment.
It would also be essential to press ahead with the on-going reforms to simplify the tax system and broaden the tax base.
In the energy sector, measures should be implemented to contain demands on the budget while improving service delivery and putting power utilities on a sound financial footing over the medium term.
The approval of the PRGF's latest tranche amounting to more than $250 million is definitely a positive development. It is a confirmation once again from an independent source that the economy of the country is progressing steadily on the right path.
Of course, there have been a few lapses but those who have been criticising the major thrust of policies have been proven wrong or were not aware of the resource constraints impinging upon the policies and the adverse consequences of past mismanagement which the present dispensation had to inherit.
After consolidation of reforms and strengthening of the macro-economic indicators, the stage is now clearly set to pass on these gains to the micro level, paving the way for poverty alleviation and improvement in social indicators.
If the country had not pursued the reform agenda in close collaboration with the IMF over the last two years and a half, such a scenario probably could not have been imagined.
Also, the present IMF approval, as usual, is a vote of confidence in the country's economic performance and policies which would be helpful in improving our credit rating in the international market and encourage investment and job creation.
However, we would urge the authorities to earnestly try to meet the specified criteria for which waivers were sought and granted.
Agreed conditionalities must be honoured and implemented to earn further credibility.
Also, it needs to be noted that the country is in the last phases of completing the current PRGF arrangement and determined not to seek further assistance from the Fund.
After the expiry of the present programme, although a regular consultative process would be maintained with the IMF, its advice would not be binding.
The new situation would offer both an opportunity and a challenge to the country for which the authorities should be prepared well in advance.
Opportunity, because the policy makers would be free in formulating policies without any pressure or dictation from the Fund; the challenge would be in the form of maintaining a strict discipline in almost all areas of the economy which would be all the more difficult when a political government is in place.
For instance, fiscal discipline has to be maintained to keep tight control on the size of the public debt, a stringent monetary policy has to be followed that keeps inflation below 5 percent, current account balance has to be strictly monitored to maintain adequate amount of foreign exchange reserves and the rupee rate at a reasonable level, improvement in financial health of the major PSEs has to be ensured and a sound and rule-based regulatory regime has to be put in place.
If the country does not adhere to this path, gains made so far could quickly evaporate.
The country has also to be extra careful in ensuring sound management of the economy because we would no more receive regular tranches from the Fund to bolster our reserve position and the sympathetic attitude of the international community cannot be taken for granted for an indefinite period.