'To' or 'not to' salvage the IMF programme

ARTICLE: Six months down the road, the present government will likely find itself in the same predicament as it did after winning the elections in 2018. At the time, it was whether to go for IMF bailout or not. PTI took eight months to go for a bailout due to shortage of dollars for debt payments, in spite of explicit or symbolic division within its own party and between 'home grown strategists' and 'conservative/risk averse' experts. To or not to salvage the IMF programme will not be as time consuming this time, but a lot depends on how complex set of political, inter-temporal, social and economic dynamics (including leverages) are evaluated by its two main signatories, namely GOP and the IMF. The purpose of this article is to stylistically sketch this dynamics and let the readers and policymakers guess the probability of its timing and meaningful, solid revival.

A brief review of the post-budget status of the IMF programme is as follows: Post-budget, the status of the programme to outsiders can be viewed as a hybrid of ON-"HOLD" and "ACTIVE". This hybrid nature stems from 3 inter-related signals, namely, review meetings, tranche releases and progress in reforms. The last one is composed of two sub-parts, i) stabilisation (mostly quantitative targets) and ii) structural. Regarding i) the targets are mostly 'soft' as they are dependent on timing of peak and duration of secondary waves of Covid-19 and cannot be strictly guaranteed by GoP. Justifiably, and for optics, the IMF doesn't want to appear unduly harsh by insisting them as 'hard' targets. The pace of 'structural' reforms is again left to GoP without any strict timelines as the IMF considers that GoP's hands are full with attempts to revive the economy and control Covid-19. The timing and outcome (in terms of progress in at least one of the structural 'benchmarks' or a waiver) of the review meeting whether one or two in the next six months and subsequent release of 'tranche' will signal that the 'ON-HOLD' programme has transited to "ACTIVE" status. Even if a meaningful headway (and not for the optics) is made in 'one' of the structural reforms, it will be a big achievement on the part of 'populist' PTI government during Covid-19. In addition, the IMF will be watching the post-budget yearly ritual of backlash from diversified Pakistani stakeholders, once the fine print of budget sinks in, in order to evaluate the no new tax 'digital' and 'triangulated' drive towards documentation. On the part of GoP, it will be comfortable to continue with this "ON-HOLD" status for the next six months as Covid-19 gives them a) the benefit of keeping the 'structural reforms' outside the radar; b) favourable worldwide optics that they are under the eye of the IMF; and c) dollars keep flowing under Covid-19-related no-questions asked multi-bilateral, concessional lending.

Ideally, the GoP would like to continue the Covid-19-related bonanza in all of FY21, but the risks are greater as the upper political boundary to successfully wrap up the IMF programme nears, which is currently Aug'22. The reasoning is as follows:

Historically all governments have embarked on touting economic revival and bursting the fiscal targets in the election year. This time will be no different. In other words, from Jan'21 to mid'22 it just leaves 18 months to meet the conditionalities, revive growth and employment to win elections. The question is: Will the PTI take the risk of being under an IMF programme and find itself struggling to meet unpopular 'structural reforms' backlog in an election year, even if the IMF extend this same programme to Aug'23 against its original date of Aug'22? Most probably not, even if the IMF is willing to condone the 'structural slippages', because the political costs to PTI's survival of being driven out of power in 5 years after the hard work of 22 years can be substantial. An interesting caveat to the above scenario is that realizing the above time-bound political constraints in reviving the IMF programme and if simmering discord with political allies' gains momentum, the possibility that by Jan'21 the political system may itself witness an unforeseen shock cannot be altogether dismissed.

From an IMF perspective, before it joins hands with GOP to revive the EFF programme it will look into the experience of first 18 months (including 9 months of covid-19 period) if there are no 'Trump' cards held by Pakistan: i) Given the simple majority government of PTI, it will be difficult to expect any substantial progress in deep-rooted and sustainable 'structural' reforms that require legislative approvals and political consensus except a few light and quantitative measures through the finance bills in the next 24 months. Unfortunately, in pre-Covid-19 period there was little to show in the area of 'structural reforms' except the price miracle of currency depreciation on imports (again more of quantitative rather than 'structural' reform); ii) the breathing space in terms of next six months given by Covid-19 to show progress in 'structural' reforms will be another data point measuring GoP's ownership of the programme; iii) IMF realizing that implementing structural reforms is next to impossible by June 2022, therefore a possible face-saving route for world optics and keep the dollars flowing in through tranches and other sources, would be to continue monitoring quantitative targets for stabilisation purposes till June' 22 and add to the existing pile of backlog of structural reforms for the next bailout; and iv) just linking the tranches, to a single foremost crucial non-politically sensitive reform, and agreeing to a stripped down version, with the possibility of declaring the programme successful by 2022.

Given the above chessboard for salvaging the IMF programme, it would be provocative to suggest that GOP continue with the 'ON-HOLD' programme till the current tenure of the program, namely Aug 2022.It has already secured roughly US $ 3 billion in concessional lending on account of Covid-19, the oil facility from Saudi Arabia remains underutilized and its debt servicing liability of roughly US 2.4 billion for FY21 is re-scheduled. This total is almost roughly equal to the remaining IMF tranches expected till June'22. This approach is, however, not without pitfalls. Once again this programme will joins ranks of similar programs in the past, reinforcing the label of one-two tranche country, but can be excused because of extraordinary event of Covid-19. Secondly, the IMF bailouts act more as a signaling instrument to the other donors that the country is under leash and not on a 'populist' highway or a profligate spender. To strengthen this perception with 'ON-HOLD" programme till June'22, the following stylistic sequencing of reforms, with popular label of "Home grown reforms" can be implemented. Among a set of reforms that are relatively less politically sensitive, the government use all its administrative resources to expand and consolidate 'digital' and 'triangulation' procedures to document the economy, irrespective whether it can achieve the 'soft' target of revenues in FY 21. The homegrown reforms in fiscal year FY22 should totally concentrate on reducing 'circular debt' and concurrently the documentation drive can go on hiatus for a year or two. Hopefully, the economy will pick up from FY22 and with better documented economy the increased revenues and its possible reinforcement by a small percentage of looted wealth in dollars may provide fiscal space for election victory, without IMF breathing on PTI's neck.

Copyright Business Recorder, 2020