IMF and Pakistan

Former Finance Secretary and incumbent Secretary of Economic Affairs Division Waqar Masood reiterated a well-known fact: that the government was deprived of programme lending since 10 May 2010, as opposed to specific project support, due to its inability to get a Letter of Comfort (LoC) from the International Monetary Fund (IMF). In this context, it is relevant to note that programme lending is accompanied by a host of policy conditions focused on improving the macroeconomic performance of the debtor government as opposed to the achievement of identified physical targets and, as such, there is considerable room for flexibility in terms of the time period specified for implementation. In effect, the borrowing country can argue that a delay in policy implementation can be attributed to a range of internal conditions (ranging from a natural disaster-like floods to lack of political will to an ongoing war on terror) and external factors (for example the ongoing global recession that has compromised our exports). However request for delays in implementation must be accompanied by what the donors consider as legitimate reasons and a realistic time period for eventual implementation must be identified. Since May of 2010 till the end of September 2011 the government of Pakistan remained actively engaged with the IMF in an effort to access the last two remaining tranches of the 11.3 billion dollar Stand-By Arrangement (SBA) that the Fund suspended indicating thereby that it was not convinced of the rationale provided for the delay in implementation. This engagement was evident from the numerous review meetings on the SBA between government officials and the Fund staff. In the end, the government and the Fund agreed to suspend the SBA with two remaining tranches undisbursed. Cessation of the IMF programme led to other multilateral as well as bilateral donors either requesting a LoC from the IMF, as that alone would provide a comfort level to the donors that Pakistan is committed to achieving policy reforms, or undertake, as opposed to commit to undertake, the agreed policy reforms before extending programme lending. Pakistan's failure to do either accounts for zero programme lending disbursement this year, in spite of the fact that the budget for 2011-12 envisages 117 billion rupees inflow as programme support from external sources. The critical question is what were the remaining tranches that led to the suspension of the SBA? First and foremost the Fund staff urged the government to end tax exemptions and bring some sectors with high earnings, including the real estate sector into the tax net. No independent economists would disagree with this proposal. Pakistan has an appallingly low tax to Gross Domestic Product ratio (under 9 percent last year) which is the lowest in the region. Secondly the government remains hesitant to implement power sector reforms that it agreed to in talks with the multilaterals. In effect, the government continues to inject large amounts in subsidy to the sector, over and above the budgetary allocation, to eliminate the inter-disco tariff differential - from the budgetary allocation of 30 billion to 238 billion rupees last year for Wapda and from 3.3 billion to 47 billion rupees for KESC. This effectively implies a heavy penalty on those discos and their clients that are performing well by ensuring payment of bills as well as lower transmission and distribution losses. Failure to eliminate the inter-circular debt, agreed with the Fund in November 2008, remains an issue. Needless to add, these two policy reform suggestions by the multilaterals would be fully supported by independent economists. Given that these two policy measures, if implemented, would go a long way in not only reducing our burgeoning budget deficit, that would reduce the government dependence on domestic loans that are crowding out private sector borrowing, but also bringing down the rate of inflation and assist in developing an energy sector that has the ability to produce at optimum capacity, one can only express dismay at the government's continued failure to implement these policies. The time for placing political considerations over and above economic considerations is at hand and the Business Recorder fully supports the empowerment of the Ministry of Finance to implement economic policy reforms that are the need of the hour. Any further delay would increase the borrowing needs of the government that in effect would be highly inflationary and not speedily resolve the energy crisis that is a major cause for not only lower productivity, but also civil unrest. It also needs to be recalled that Pakistan debt to the IMF exceeds 200 percent of its IMF quota. As a consequence, Pakistan would be subjected to Post Programme Monitoring and the first report is expected in May. So whether, Pakistan seeks another IMF loan or not, it would be subjected to PPM. The 2011 Article IV consultation (delayed) speaks clearly that the Pakistan economy is highly vulnerable with few buffers to absorb shocks and ward off the growing risks the economy faces ahead. The report brings out quite vividly the economic and social costs of avoiding structural reforms. In case FY12 is a repeat of FY08 when the economy was in a free fall with collapsing output falling forex reserves and inflation soaring - perforce Pakistan would once again require large-scale injections of IMF money. The political leadership needs to be explained this economic assessment. Missing the fiscal deficit target could lead to stagflation. This would be more troublesome to tackle. The IMF may not have a direct leverage on Pakistan's economic and financial policies. But their good housekeeping seal would still be needed to access other sources of forex inflows. Copyright Business Recorder, 2012