What a volte-face it has been: from insisting that Pakistan will never go on the IMF programme, a promise that generated hectic activity and many a foreign trip to rich lands considered to belong to an elite group referred to as Friends of Pakistan who could be easily tapped to extend assistance valued at anything between 10-15 billion dollars (our minimum need according to those holding the portfolio of finance) to 100 billion dollars (as noted by President Zardari to cover our cost of the war on terror as well as for the democracy dividend); to insisting that borrowing from the IMF was the last resort considered unlikely; to now insisting that IMF prescription is good for us.
The latest, according one senior member of the Executive who should remain nameless, except to the millions who watched him on television, is that the IMF package has not come attached with any conditionalities. If that is so, then the earlier hesitation of the government not to go on the programme is all the more inexplicable. Inexplicable, however, has been the operative word from the time the government began to feel the financial crunch to the time that a formal request for assistance was made to the IMF through a letter of intent last week.
But what is the real picture? Is the IMF programme good for us? Is it in line with our government's indigenous reform agenda? Many argue that we are already on a much needed reform programme that they consider part of IMF loan preconditions. And the first tranche at periodic intervals release additionally implies that there will be strict surveillance by the IMF of what the government does with respect to its economic policies. Failure to comply, which will be determined by failure to achieve macroeconomic targets, may result in non-release of the second tranche.
It is fairly evident that members of the government have not presented a united or, indeed, consistent front on this vital issue and reference here is only to the decision makers belonging to the ruling party. Be that as it may equally relevant is it to note two facts about the IMF programme that the Fund makes available on its website. First and foremost, it has a few lending instruments. First, Stand-By Arrangement (SBA) is designed to assist countries to address short-term balance of payments problems and this type of lending constitutes the largest amount of IMF resources.
The length of a SBA is typically 12-24 months, and repayment is normally expected within 21/4-4 years. Surcharges apply to high access levels. In the case of Pakistan, the SBA is for 7.6 billion dollars for 23 months, within the realm of the Fund's stipulated guideline. The applicable surcharge for Pakistan would vary from 3.51 percent to 4.51 percent, with repayment within five years beginning 2011. The loan amount constitutes 500 percent of our quota in the IMF.
Under the IMF policy of normal access, we would have been eligible for up to 100 percent of our IMF quota on an annual basis and 300 percent cumulatively, so Pakistan did receive considerably more than provided for in the guidelines. Iceland, it may be noted, a developed country, received 2.1 billion dollars from the IMF under the stand-by arrangement in October this year.
The second lending instrument is the Poverty Reduction Growth Facility (PRGF). Eligible countries (and Pakistan is eligible) can access around 140 percent of their quota. Pakistan's quota is 1033.7, and 140 percent of this would be around 2 billion dollars. While this amount was not adequate to meet the country's urgent needs, yet it might have been a coup for the government of Pakistan to access the money from this source. Ukraine received 16.4 billion dollars from the IMF under the emergency lending procedures, another IMF lending instrument, which provides interest subsidies and the release of the money taken between 48 to 72 hours.
To reiterate, with the exception of PRGF and crisis prevention instruments (like what was made available to Ukraine) all other IMF lending instruments are non-concessional or market related interest rate is applicable "known as the "rate of charge," and some carry a surcharge. The rate of charge is based on the SDR interest rate, which is revised weekly to take account of changes in short-term interest rates in major international money markets. Large loans carry a surcharge."
A function of the IMF, clearly stated on its website, is that of surveillance which involves the monitoring of economic and financial developments, and the provision of policy advice, aimed especially at crisis-prevention. Thus this function too is normal and not Pakistan specific. IMF is therefore going to monitor the economic indicators quarterly and any slackening in achieving the agreed stipulated targets, unless supported by data which indicates external factors are at play, would place us right back to where we started: a poor credit risk for concessional and non concessional funding.
Shaukat Tarin, when asked why the government of Pakistan requested for an SBA loan instead of the PRGF, which would have been a coup of sorts, replied "Pakistan's default risk to too high", and implied that we should be grateful to receive the IMF loan at the interest rate that we did. IMF is not into commercial lending and its support is invariably linked with economic advice for crisis ridden countries. Given that Pakistan is in a crisis the question remains: why did not the government seek concessional funding like that made available to the Ukraine and instead agreed to a SBA, like in the case of Iceland? One can only hope that an official response to this question would be forthcoming.
The IMF in a briefing revealed that: "the gross external financing requirements for 2008/09 are $13.4 billion. This includes the external current account deficit plus amortisation of medium-term and long-term debt and maturing short-term debt. And out of the $13.4 billion, the financing, not including the Fund, would be about $8.7 billion. That would include FDI of the order of $4.5 billion, plus also medium- and long-term borrowing from multilateral institutions including the World Bank, the Asian Development Bank, the Islamic Development Bank, and some financing from bilateral creditors for projects.
There are also a few items that are not so important, but then the remaining gap of the order of $4.7 billion will be filled by IMF resources in 2008/09." Thus the IMF injection will plug the foreign financing gap and Pakistan would be well out of the woods if financing other than the Fund's finds its way in.
Analysts however express doubt about a 4.5 billion FDI during a global financial crisis followed by recession in several Western countries and the fact that Friends of Pakistan have yet to make a firm commitment in this regard.
That they will do so shortly has been the mantra of the present government; however it must be borne in mind that the government has been over-optimistic about its ability to generate funds from abroad to date and one will have to follow the old adage: see an inflow to believe it. There is, of course, no disagreement about 2 to 2.5 billion dollars injection from the International Financial Institutions (IFIs); however, there is still concern about project financing from bilaterals, if what happened in the Friends of Pakistan meeting in Dubai is an indicator.
The IMF also noted that, "the idea in the programme (Stand-by Arrangement) is to discontinue this borrowing (from the State Bank) for the period between November - June of this fiscal year. And in order to eliminate this borrowing from the central bank, what is important is that in the auctions of Treasury bills, the interest rates will have to be sufficiently attractive for commercial banks to purchase enough Treasury bills, so that the domestic borrowing requirements of the government are covered through commercial bank sources, and also from other non-bank sources like Pakistan investment bonds, for instance, and the national savings scheme." This would necessitate a mini-budget and on an urgent basis no later than the current month of December.
To conclude there was little option for the government but to go on the IMF programme though one would have hoped that the government had negotiated more vigorously on the lending instrument that was made available. In addition the IMF inflow must not be seen as a case where inflationary pressures will abate - on the contrary they may well rise in the short to the medium term as the government struggles to meet its macroeconomic targets. One hopes that the sacred cows, and farm income of the rich landlords is major one, will be taxed to generate its revenue rather than relying on indirect taxes, like GST, whose incidence on the poor is relatively more than on the rich.