Discarding the IMF route

It is widely reported that there has been a great deal of tussle between the Ministry of Finance and the State Bank of Pakistan in the weeks lately over engaging the IMF for another programme. According to the minutes of an official meeting as revealed by newspapers, the then Finance Minister, Abdul Hafeez Sheikh, the then Secretary Finance, Wajid Rana, and incumbent Deputy Chairman, Planning Commission, Nadeem-ul-Haq had strongly supported the idea of obtaining a fresh bailout package from the IMF prior to the eruption of crisis on the balance of payments side that was expected in the last quarter (April-June) of the current fiscal year.
Wajid Rana is reported to have stated that low foreign inflows and debt repayment obligations between January and June, 2013 would be around dollar 4 billion that would put pressure on exchange rate and foreign exchange reserves, especially during the transition period. In exchange for a three-year programme with the IMF, the conditionalities could include mobilisation of additional revenues of 3.5 percent of GDP in the next three years, with upfront jacking up of revenues by 1.5 percent of GDP together with energy sector reforms by withdrawing subsidies and these reforms were implementable. Nadeemul Haq was even more forthright. He said that both investment and growth were plummeting while the central bank was not clear about its policy anchor. He also asked the Governor, SBP how long the central bank could continue to defend the rupee with low reserves and adverse external environment, especially when the State Bank had already lost dollar 1.4 billion in defending the currency. Giving the analogy with high cholesterol and heart attack, Deputy Chairman, Planning Commission asserted that the patient should start acting when he sees symptoms of high cholesterol rather than waiting until the actual heart attack.
Governor, SBP, however, is reported to have strongly opposed a new IMF programme for the time being, saying that even though the forex reserve position was challenging but it was manageable. Foreign exchange reserves would be between dollar 7.5 billion and dollar 8.5 billion by the end of June, 2013 and there would be no balance of payments crisis as additional flows will come in as a result of FDI from Saudis, export of sugar and wheat, and currency swaps. When challenged for his assessment, the Governor said that by the time there was pressure on the balance of payments, currency swaps with China and Turkey would be fully operational and there would be no crisis at all. Finance Minister, Hafeez Sheikh, Deputy Chairman, Planning Commission, Nadeemul Haq, and Finance Secretary, Wajid Rana were reported to have failed to convince the Governor, SBP of their economic logic. Obviously, political leadership of the country has preferred the advice of the SBP Governor, as is evident from replacement of Hafeez Sheikh and Wajid Rana with other aspirants to their jobs. According to a news item in the Business Recorder on 5th March, 2013, Pakistan has not made any formal request for a new programme.
It is no secret why the present political leadership of the country has opted to side with the Governor, SBP and neglected the sane advice of other important members of the economic team of the country. By not negotiating and entering into an economic arrangement with the IMF during the next few days, the present government would tell the electorate that economic situation of the country was satisfactory when they had left the government.
As such, the caretaker or the next elected government could be blamed for making a mess of the economy which had forced it to negotiate a bailout package with the IMF in exchange for strict conditionalities, which would make the lives of ordinary people still more miserable. While the stance of the incumbent government is understandable, the State Bank's position is quite puzzling when the balance of payments crisis is looming large on the horizon and the country needs to take the necessary measures now to stabilise the economy rather than letting the crisis to occur and then rush to the IMF for some kind of assistance. It is of course very risky to take the patient to the doctor when he is already half dead. As both private and official flows except CSF have almost dried up and international prices of oil are surging, the current account is projected to post a deficit of around 1.5 percent of GDP during FY13. With major IMF loan repayments stacked up for the remaining four months of the current financial year and first half of the next fiscal year, the deterioration in balance of payments will put further pressure on the weakening exchange rate and reserves position of the country. Also, it needs to be understood that conditionalities would be much harsher if we delay the negotiation of another programme until it becomes absolutely necessary and we have no choice but to beg for another package to keep the country solvent. Currency swaps about which the Governor is so optimistic are just a kind of temporary balm to conceal the real injury to the economy. We must try to take concrete measures as soon as possible to turn the economy around and ensure a sustainable position in the balance of payments before driven to the brink. Pain of adjustment would be somewhat eased and the country would be constrained to adopt much-needed reform agenda if the path of adjustment is backed by the Fund's advice and financial assistance.