IMF tranche

The Executive Board of the IMF on 27th June, 2014 completed the third review of Pakistan's economic performance, enabling the country to receive disbursement of an amount equivalent to SDR 360 million (about US $555.9 million). However, in order to complete the review successfully, the Board had to approve the authorities' request for a waiver of non-observance of the end-March performance criterion on the ceiling of the net domestic assets of the SBP, as well as modifications to adjust the end-June performance criterion on the net international reserves target and the end-June fiscal deficit target.
While the IMF would appear to be largely satisfied with the third review of the EFF programme, which was necessary to release the next tranche, the statement released after the Board meeting should be an eye-opener for the Pakistani authorities due to so many strictures passed by the Acting Chair and First DMD about the latest trends in the economy. It was stressed that "macroeconomic conditions are improving, but downside risks remain." Continued efforts were required to safeguard the fragile economic recovery. Fiscal consolidation remains broadly on track but efforts to broaden the tax base and increase tax-to-GDP ratio should be accelerated. Efforts to boost foreign exchange reserves were bearing fruit and should continue including through spot purchases, greater exchange rate flexibility and a prudent monetary policy. The policy interest rate should be set so as to bring inflation down over time. Banking system remains financially stable and profitable. This stability could be further enhanced by ensuring compliance of the few banks that fall below minimum capital adequacy requirement. Energy policy reforms were welcome but addressing the administrative constraints on the power sector's regulatory framework and improving the operations of energy companies were important. Efforts to reform PSEs should also continue. "Plans for trade policy and business climate reforms are being developed, but firmer actions are needed to boost economic growth over time."
One has not to be a genius or an economist of high caliber to decipher the language and draw conclusions from the language of IMF statement, which could easily be interpreted as a kind of warning to the country to behave properly in future in order to continue with the programme. It is good to see that Pakistan would be able to receive a substantial amount in foreign exchange at a lower than the market rate, leading to a considerable rise in foreign exchange reserves of the country, stabilisation of the rupee rate and safeguarding a positive view of the economy for investors and credit rating agencies. But it must be kept in view that the tranche would not have been approved and the flow of funds from the IMF would have been stopped if waivers for non-observance of certain performance criteria would not have been granted. Anybody familiar with the working of the Fund's Executive Board is aware that waivers are only granted and weaknesses of the economy are overlooked if developed countries have a sympathetic attitude towards the borrowing member, which could change at the time of subsequent reviews.
Anyhow, it is quite clear that Pakistani authorities have to work very hard and adopt tough measures to remain on track and ensure continued assistance from the Fund. Government needs to make certain that the country in future has not to ask for waivers, which in fact means favours likely to be turned down, if the country is not in good books of the developed countries, particularly the US. The list of required actions is also long and highly difficult to implement. For instance, when the statement says that the policy interest rate should be set so as to reduce inflation and foreign exchange reserves should be boosted through greater exchange rate flexibility, it clearly implies that the country has to raise interest rates and let the currency depreciate according to the market conditions. Loathing of the present government to these suggested measures is, however, well-known. On the fiscal side, IMF wants the government to broaden the tax base and increase tax-to-GDP ratio by eliminating tax concessions, exemptions etc. Unfortunately, the authorities do not only appear to be faltering in these important areas but have to devote more resources for the ongoing war on terror and resettlement of IDPs. Additionally, the present government has a poor habit to undertake grandiose and visible projects for political expediency when social sectors are crying for resources. The task of the government to launch a major fiscal effort has also become more difficult due to mounting political resistance. All of this indicates that the future of the present EFF programme could be in jeopardy if the government does not mount a major effort and the opposition parties do not cooperate to undertake the necessary reforms to ensure the continuity of the programme. We know that the task at hand is difficult but the present state of the economy cannot be improved without undertaking biting reforms, implementing harsh measures and forgetting political imperatives, at least for the time being.