A debate is going on in the country whether the economic conditions are such that economic stability would be restored only through a new programme from the IMF. We would attempt to give a viewpoint in this debate.
A way to approach the question is to ask what conditions prevailed in the past when the country rushed to the Fund for a programme. We restrict the history to the programmes since 2000, when the military government had signed a 10-month Stand-By Arrangement (SBA) followed by a three-year poverty reduction growth facility (PRGF) in 2001. After that, two programs were done in 2008 and 2013. So we look at the key economic indicators prevailing just before the signing of the above programmes.
The 2000 programme was undertaken in the backdrop of the so-called 'lost decade' characterized by political turmoil, economic disruption and repeated failure of at least four IMF programmes during that period. Growth had averaged 4%, significantly below the 6% for the greater part of country's history, inflation was high at 10%, budget deficit averaged around 7% of GDP, current account deficit averaged about 5% and reserves were sufficient for 4-5 weeks of imports. Besides, the sanctions imposed in the aftermath of nuclear tests, in May 1998, created the need for seeking Paris Club rescheduling. These initial conditions posed serious threat to macroeconomic stability and without an appeal to the Fund would have made things intractable. Even though the Government was seeking the programme from the time it assumed the office, past history of failures prevented immediate approval. It took more than a year for the 10-month SBA to be negotiated. However, the approval of the three-year programme was smooth both because of good performance under SBA and the tragedy of 9/11 that made Pakistan an ally of the western governments.
Going to IMF in 2008 was quite surprising because it was happening in the aftermath of an unprecedented growth and economic stability during 2000-2007. Two things had undermined the gains of that period. A judicial crisis ensued after the president suspended the chief justice, which led to a lawyers' movement, and the global financial crisis that led to skyrocketing of the oil prices. In the backdrop of these developments macroeconomic framework was rapidly unraveled with fiscal deficit shooting to more than 7% and current account deficit climbing to 8%. The reserves, which had reached a historic level of $16 billion began to fall and were bleeding at the rate of more than $1 billion per month and the exchange rate had depreciated nearly 25% by September 2008. Contrary to the assessment of the economic managers that things could still be turned around if non-IMF support from WB and ADB were continued to flow. However, the international establishment decided against it and showed the country the door to the Fund programme. Accordingly, a 23-month SBA was signed in November 2009.
In 2013, the economic conditions were quite precarious. The programme of 2008 was aborted midway, as the government failed to implement structural tax reforms. The economy suffered due to floods, continued high oil prices and poor economic governance that saw frequent changes in economic managers at all levels. The average growth in 2008-13 was 3% and inflation about 12%. Fiscal deficit, without recognizing power sector circular debt, was close to 7% and 8.2% otherwise. At the close of FY13, the reserves were down from a high of $18 billion to $10 billion (SBP $6 billion, with significant liabilities falling due within the next 18 months) sufficient for 6 weeks of imports. Current account deficit was low and external financing had completely dried.
It was inevitable to approach the Fund and seek another programme. The 2013 programme was a three-year extended fund facility (EFF) signed by the then newly elected government of PML (N). It was based on the reforms that the party had included in its manifesto. Accordingly, considerable commitment was shown in fulfilling commitments and achieving programme targets. The programme also earned the distinction of the first fully implemented and 100% disbursed programme in country's checkered history of IMF programmes. But no sooner the programme was ended the government began to upend all its gains. The results, at the close of the government's term, are such that it is difficult to visualize how one can undo the good work of a three-year-successfully-completed-programme within 18 months and push the country to again seek a Fund programme.
The upshot of the review is that the conditions that surround the economy before it becomes inevitable to seek assistance of IMF include the followings: (a) a high fiscal deficit (mostly caused by falling tax revenues or rising subsidies, like tariff differential subsidy (TDS)); (b) the fiscal deficit leads to excess demand on the external account by increasing the demand for imports, causing current account deficit; (c) the failure to mobilize adequate external financing leads to draw-down on reserves (particularly when there is also a desire to keep the exchange rate artificially stable) which pushes the country closer to default as debt servicing needs become acute in the absence of fresh external flows; (d) this chain of events is exacerbated if accompanied by an external shock (high oil prices) and change of government (because the hope of improving the poor economic performance of a government can only be achieved by the succession of a government with fresh mandate).
We can now use the above test to check whether the existing conditions are such that seeking a Fund is inevitable. It is straight forward to see that all four conditions - rising fiscal and current account deficits, rapid depletion of reserves, drying up of external resources and change of a government after poor economic management - are met. Hence, there is no escape, based on the past pattern, from seeking the Fund programme.
Note that in the test that we have formulated above, the conditions relating to growth, inflation, interest rate and exchange rate are not explicitly present. However, these factors were in bad shape in almost all previous episodes of going to the Fund. However, this time, we have a very different situation, where growth (5.8%) is the highest in 13 years, inflation is exceptionally low (3.2%), private sector credit is unprecedently high, investments are rising and consumer spending is strong and robust. All these conditions are auspicious for the economy, but this is threatened by the imbalances, which have assumed a menacing form.
The speed with which the country is losing reserves, even after significant borrowings, we may not be able to continue beyond a few months. We must stem the decline in reserves. In the absence of radical measures along the lines of re-introducing the controls that the country practiced three decades ago - which no one would recommend - we see no alternative to an immediate approach to the IMF for a new programme. However, it must be borne in mind that doing so would require considerable, painful adjustments to remove the imbalances that are undermining an otherwise buoyant economy.
(The writer is former finance secretary)
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