US, Afghanistan and IMF

A rare opportunity to extricate Pakistan's economy from its on-going tribulations has emerged by the recently started peace initiative in Afghanistan by the US. The process which began with meetings in Doha, moved to Abu Dhabi and more recently the principal actors from the US spent considerable time in Islamabad. Notwithstanding some reports that have cast doubts on the success of the process, the momentum generated is unprecedented since the Afghan war started in October 2001.
Two developments are most significant, namely the surprise visit of Senator Lindsey Graham and high-profile visit of the Commander of CENTCOM, General Joseph Votel. While the military level talks were held in-camera, the details regarding Senator Graham's engagements were widely publicized besides his engagements with the press and media. His discourse throughout was upbeat and highly optimistic. But his messages contained a multitude of signals which have to be carefully dissected to discern what exactly the United Stated is offering for peace and expecting from Pakistan in return.
In a press conference, Senator Graham said: "I just met with Prime Minister Khan and the Foreign Minister. Somebody asked me about my impression: I was blown away, I can see why he won, very impressive. I have been coming here for a long time, and its usually for telling the Americans what we would lose if things go badly here and that we can't afford to walk-away from Afghanistan,we got to stay involved, because if we don't get it right then we can get hurt again, and there is a lot of truth there. But this is the first time that I can go back home and tell the people that there is a lot to be gained here. I have a different view now than I did even a year ago. Somebody wanting to see building a fence or wall, come to Pakistan. The plan to secure the border on Pakistan side is very robust, the military operations in that part of Pakistan dealing with terrorist entities is real. And 5000 Pakistani soldiers have lost their lives. That doesn't get reported enough; and it is new and it is different. But the thing about Prime Minister Khan is that he is also new and different.
This relationship (between the US and Pakistan) has been pretty much transactional since 9/11: You do this, we will do this and if you don't do it, we take it away from you. That's a mistake. And the Prime Minister says he wants to get away from the transactional relationship and try to establish a strategic relationship with the United States. So, I am going to go back and I can tell to President Trump about my meeting with Prime Minister Khan and I am going to urge him to meet with the Prime Minister as soon as practical. Prime Minister Khan was criticised over the decades, over the past ten or twenty years, for talking about reconciling with Tailbone. He was right. But one thing I would say is that the war in Afghanistan will end through reconciliation, And with Prime Minister Khan we have a unique opportunity to change our relationship to go from transactional to strategic, and the way to do this is to integrate our economies through a free trade agreement; and the IMF loan will stabilise, in the short term, Pakistan economy. But if we can get to a free trade agreement, and integrate economies of Pakistan and United States', that would be a game changer for Pakistan".
Barring a few remarks to military leadership in the early years after 9/11, such words were never heard from a powerful US Senator since the time of Congressman Charlie Wilson who fought alongside Pakistan against the Soviet occupation of Afghanistan. The bellicose rhetoric between the two countries for greater part of new century gradually turned into outright disgrace and humiliation, especially after the US President announced his policy for Afghanistan and South Asia in August 2017 and his new year tweet last January where he used fairly harsh language. Just a few months ago, in fact a day or two before he sent his first request for Pakistan's support to prime minister, he again found an occasion to use fairly objectionable language regarding Pakistan's role in Afghanistan.
While these words should be welcomed, it would be unrealistic to expect that the belligerence between the two countries would vanish overnight. But a moderation is indeed what the two countries should work for sincerely.
One silver-lining for the government is the hint regarding the US support for an IMF program. That this is a major reversal of the US policy can be understood only in the backdrop of Secretary Pompeo's statement which warned Pakistan that its application for an IMF program would be closely scrutinized for its possible use to payoff expensive Chinese loans. Despite the fact that the US doesn't carry a veto power in the Board of Executive Directors of IMF, the statement had the effect of souring the general sentiment and atmosphere surrounding Pakistan plans to approach the IMF. This has been compounded by new Government's dithering to seek IMF program with the result that the economic stability is constantly dodging the economic managers.
This new goodwill from the US is a highly valuable help that the government should capitalize by opening a dialogue with the Fund and concluding a Fund program at the earliest. No amount of friendly support, no matter how long can it delay the final reckoning, would help close the major imbalances, fiscal and external, facing the economy.
Postscript: The mini-budget is a clear signal that the Government is in no hurry to seek a Fund program, or would do the necessary tax effort only after it goes into the program. There is no significant tax effort and hence the tax-gap for the year would continue to rise. Under the circumstance it seems the fiscal deficit would continue to remain a major challenge for economic managers.