Elusive IMF bailout: the end of the road?

The International Monetary Fund (IMF) and the country’s political situation are the two main issues that are haunting the nation since 2018. While political instability or premature end of a government is a known phenomenon in Pakistan, the inclusion of IMF in the political milieu has thrown the nation into a hitherto unprecedented turmoil.

The most regrettable aspect of this situation is the fact that both the elements of turmoil are essentially home-grown and self-inflicted.

With the IMF programme gyrating between “On again and Off again” ever since 2018, it is increasingly becoming clear that our economic teams have really not fully understood what IMF is all about and its cardinal mandate, its Standard Operating Procedures and rules, with little room for flexibility.

The past government attempted to seek concessions from the Fund on subsidies to appease its vote bank and the incumbent government too endeavored to do the same. All attempts aimed at extracting any concessions from the Fund failed.

Even the impact of the devastating floods on the country’s economy and growing fiscal vulnerability could not convince IMF to budge from its stand. This should have been a message to our economic managers that the IMF means business.

The past government moved its stand from ‘GO’ to ‘NO GO’ and when it fell it had walked out of the IMF programme to have its way; whereas, the incumbent government held on to the IMF but kept it at bay while it rolled out a much-trumpeted people-friendly budget for fiscal year 2023-24. Needless to say, it was fully aware that much of the people-friendly part would be shot down by the IMF.

The strategy of better optics and short-term gains, compounded with the demonstration of government intentions of being people friendly, if not restricted by IMF, may have been achieved but at a perilous cost to the economy.

The leading economists of the country knowing the reaslities voiced that the: “Government has given an unprecedented Rs2.24 trillion in tax exemptions during the outgoing fiscal year, a mind-boggling figure that will further weaken the case of Pakistan in the eyes of international financial institutions and foreign nations.”

The Rs 2.24 trillion worth of tax exemptions were 28% higher than the previous fiscal year’s. They were equal to 43% of the total exemptions given by the past government during its less than four-year tenure, according to the figures released on Thursday.

The IMF reacted faster than expected with the budget still in the incubator and being debated in parliament. “The International Monetary Fund (IMF) has raised serious objections over the budgetary framework for 2023-24 and asked the government to increase both tax and non-tax revenue efforts”.

A senior Ministry of Finance official conceded before the committee that the IMF was not satisfied with the budgetary framework for 2023-24, so they would have to defend increasing the petroleum development levy up to Rs869 billion for the next fiscal year against revised estimates of Rs542 billion in the outgoing financial year.

In the present scenario the government has to meet the three outstanding conditions already announced by IMF plus the amendment in the budget in order to proceed with the program. The government is in a tight corner. It is struggling to meet the three conditions since long.

On top of it, the withdrawals of concessions, subsidies and increase in salaries and pensions of the government employees is embarrassing and has caused harm to its credentials. This is the most difficult part of the decision.

Insofar as the IMF is concerned, the incumbent government is well aware that it has reached the end of the road. The statement of the Prime Minister that in case things do not go well with the IMF he would take the nation into confidence says it all.

In other words, it will not augur well for the country and its people.

If one analyses the interactions of the two governments with the Fund since 2018, it brings home very clearly that seeking IMF loan may be relatively easy but implementing its terms is an arduous task and accomplishing it is not possible if one is not clear-headed enough to make right decisions with a view to achieving long- term gains to serve the national interests.

One of the main reasons behind the conflict between the governments and IMF since 2018 has been selective subsidies to industry, fuel and the social sector. It primarily rotated around constituency politics and the Fund’s stiff resistance to untargeted subsidies to the elite or powerful interests.

It also brings home the fact that diplomacy or lobbying to influence the IMF has a limited scope. It may have an impact to ease out any political considerations and aspects of country risk which the IMF could be contemplating, but that too hinges on the full compliance of other conditions laid out by the IMF for the country.

Unfortunately, however, Pakistan has not gone past these conditions; hence no impact of diplomatic intervention. Multiple meetings with the US diplomatic mission in Pakistan and in US and their sympathy to our cause could not yield any IMF concession.

Looking back, if the governments had sincerely owned the IMF programme from day one, and had accordingly restructured and reformed the economy and instituted policies to maintain fiscal discipline, the country could have been in a much better shape as regards its economy and fiscal strength in spite of country’s lingering political turmoil.

Technically, India went bankrupt in early 1990s and approached the IMF. Their balance sheet was not good enough to help the government avail an IMF loan. Therefore, India had to pledge its gold reserves as collateral and transfer them physically into the vaults of the IMF.

Overriding the political fallout and its adverse consequences, the government of the day swallowed the embarrassment, followed the IMF conditions in letter and spirit, restructured and reformed their economy and instituted fiscal discipline, timely paid off the IMF and moved out of IMF for good.

From then onwards, their economy leaped forward positioning India of today among the four leading economies of the world.

Just one bold decision backed by immense political will and the commitment to stay the course despite all the ensuing pain and unpopularity has moved India from doom to excellence. This phenomenon is yet to be witnessed in Pakistan.

Copyright Business Recorder, 2023