IMF and economy

Pakistan's economic team has now openly acknowledged that it has begun preliminary talks with the International Monetary Fund (IMF) for a new assistance package.
The IMF revealed to this paper that no formal request for a new package has been received; and while noting that Pakistan has never reneged on loan repayments in the past maintained that the Fund does not expect Pakistan to renege on the next repayment under the 2008 Stand By Arrangement (SBA) scheduled for next month. The IMF may delink the repayment of SBA with a new programme loan however money is fungible and no one would fail to see a link between approval/releases under a new programme with the repayment scheduled under SBA.
Dr Hafeez Sheikh, the federal Finance Minister, who has finally publicly accepted that the country will seek another IMF programme loan this week past, after numerous denials during this calendar year, must respond to questions about his earlier claims of economic achievements that, as a consequence, have been proved erroneous. He has been at pains to inform the PPP leadership that there have been two major economic achievements since he took over the portfolio, a claim evident from the content of speeches delivered by both President Asif Ali Zardari and his son Bilawal Bhutto Zardari in recent months who, without doubt, were guided by the Finance Minister.
First and foremost the dramatic rise in remittances. There is no doubt that remittance income has risen significantly and rose to 4.3 billion dollars between July-October this year and is forecast to rise to 4.96 billion dollars in the comparable period next year. The reasons are: (i) State Bank of Pakistan's policy in this regard; and (ii) the historically low rates of interest in countries where the majority of our remittance income is generated from, low rates used as a policy tool to combat recession. And as and when the rest of the world comes out of a recession and interest rates rise remittance income would also decline.
There are four riders conveniently ignored by Hafeez Sheikh: (i) the dramatic decline in portfolio investment as an outcome of his three unrealistic budgets where expenditure and revenue generating measures were flouted within two months of parliamentary approval of the budget; (ii) continuation of the hundi/hawala system indicative of a severe leakage due partly to continued law and order problems, partly to loadshedding and partly to the sustained erosion of the rupee vis-a-vis other major currencies of the world; (iii) the trade imbalance rising with the import bill rising at a much faster pace due to the eroding rupee than the rise in exports; and (iv) external assistance of only 284.2 million dollars has been disbursed during the first six months of the current year against Dr Sheikh's budgeted external assistance of 2.8 billion dollars for the entire year (if the exchange rate is taken to be 100 rupees to a dollar as opposed to a little less than 95 rupees to a dollar in June this year when the budget was announced). The budgeted inflows are simply too unrealistic if the first six months are taken as an indication. The New York Times reported that the Pentagon quietly notified the Congress that the US would reimburse 688 million dollars to Pakistan under the Coalition Support Fund; however, even if this amount is disbursed before the caretaker setup the total external inflows would still be less then half of what Dr Sheikh optimistically budgeted.
Secondly, the Finance Minister never tires of referring to the 3-plus growth rate as an indication that in spite of global recession Pakistani economy registered a growth rate higher than in most other countries. In this context four relevant factors were again conveniently ignored by Dr Sheikh: (i) overstating the growth target reflected by his refusal to allow the Federal Bureau of Statistics to calculate the growth rate based on extensive studies over a period of six to seven years, that revealed changing sectoral relevance in the economy, (ii) insisting on 2000 as the base year where output was appallingly low and exports non-existent as the international community sought to sanction Musharraf's bloodless coup, (iii) heavy loadshedding and law and order issues leading to relocation of several industrial units to foreign countries, and (iv) India, exporter of similar products as Pakistan, and China, with heavy engagement in Pakistan, registered more than double Pakistan's growth rate.
In years past when a technocrat was elevated to the post of Finance Minister there was a general consensus amongst politicians that the incumbent was apolitical. Dr Sheikh's three budget speeches extolled the PPP leadership, deceased and present, and there was little indication of taking even members of the coalition into confidence, leave alone members of the opposition, with respect to the budget proposals.
In addition, unlike his predecessor Shaukat Tarin Dr Sheikh has extended tacit support to corruption by his colleagues by acts of omission though perhaps not of commission. His failure to form a consensus within the energy committee that he heads with Ahmed Mukhtar and Dr Asim Hussain as members - PPP loyalists both - reflects an inability to negotiate effectively even amongst friends. His routine misinformation to his colleagues based on data that he is accused of manipulating reflects a mindset that is unlikely to formulate a realistic budget. And he is being taken to task in cabinet meetings for claiming that the rate of inflation is declining due to his policies. And finally he is not supported by the opposition.