The latest statement issued by the International Monetary Fund (IMF) can easily be construed as a "Letter of Discomfort (LOD)" in marked contrast to the Letter of Comfort (LOC) that was actively being sought by the country's economic team led by Dr Hafeez Sheikh.
The LOC was considered critical to the release of assistance from other multilaterals as well as bilaterals, linking their desperately needed pledged outflows to Pakistan with adherence to a rigidly IMF-monitored reform agenda. What must be particularly irksome to the country's executive is the unambiguous IMF assessment that structural reforms moved during late 2008 (the Stand-By Arrangement with the IMF was signed on 20th November, 2008) when an abrasive Shaukat Tarin was in-charge of the Finance Ministry who had reportedly alienated several of his cabinet colleagues by insisting on greater transparency in awarding of the contracts, including in the highly controversial rental power projects; but, the IMF adds ominously, structural reforms "have been retarded or reversed in 2010 and 2011," the period of tenure of the present lot of our economic team.
What is significant is that blame for poor compliance with respect to structural reforms was not squarely laid by the IMF on external factors including the ongoing global recession and the devastating floods in August. Instead the IMF argued that while in 2008, 2009 "steps were taken to strengthen bank supervision, bolster social safety net, reform petroleum pricing and taxation and liberalise the foreign exchange market," yet progress made through the promulgation of the three presidential ordinances on March 15 with a validity of three months and the issuance of the statutory regulatory order the same day envisaging the reduction of exemptions was "much delayed...and its scope has been far narrower than earlier envisaged." In short, the IMF contends that compliance with the agreed reform agenda remains an issue, a contention that is unlikely to lead to successful completion of the fifth review, a prerequisite to the release of the tranche.
This bodes ill for the credibility of the recent statements emanating from the Ministry of Finance that held out hope that the economic team would be able to successfully persuade the IMF/World Bank during its participation in the summer meetings in Washington DC, ongoing at the moment, to hold the fifth review in May as a prelude to the release of the second-last tranche prior to the end of the current fiscal year on 30th June.
The disturbing IMF assessment has been echoed in the State Bank's second quarterly report, which states that "Pakistan's discussions with the IMF have been difficult primarily because of socio-political resistance to paying taxes. Hence it is not surprising that (the IMF) programme is suspended and even some of the recent tax measures maybe viewed as second-best, being one-off nature." Additionally the report urges the government to closely monitor the status of the IMF programme and fiscal pressures. In short, the SBP considers successful completion of the IMF reform programme stalled due to failure to increase revenue as necessary for the economic health of the country.
There is unanimity of opinion between the SBP report and the IMF statement as to two major reasons for the stalled IMF programme namely (i) political uncertainty resulting in weak governance that has compelled the government to reverse or postpone unpopular economic decisions including raising the price of oil to the international level as well as continuing to subsidise electricity rates and (ii) law and order issues. Political uncertainty stems from the fact that the PPP government is a minority government and can be held hostage by its coalition partners. However, it is critical for the government to acknowledge that its prime responsibility to those that voted it to power is to take unpopular but economically needed decisions and not fall back on its mantra of reconciliation and consensus that is the reason for the delay in the implementation of the structural reform process. Instead the government must understand that if structural reforms are made effective the consequent economic growth would raise its popularity ratings that no other party would be able to erode. Half-hearted measures cause greater uncertainty in the minds of the general public without providing any relief with respect to two indicators that matter to the general public namely food inflation and unemployment.