The second and final review of the nine-month Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) was reached this week past (announced on 20 March 2024) however macroeconomic indicators of paramount importance to the general public’s quality of life, primarily inflation, failed to provide any comfort level across the country’s socio-economic spectrum - the vulnerable, poor, lower middle, middle-middle, upper middle to high earners.
The Consumer Price Index as per the Pakistan Bureau of Statistics (PBS) declined from 28.3 percent in January to 23.1 percent in February – a decline of 5.2 percent however independent economists/statisticians dismiss the claim as an outcome of data manipulation and maintain that the actual figure for February is from between 2.5 to 3.5 percent higher.
Even if one takes the PBS data as accurate the fact remains that there is no feel good factor as far as the general public is concerned as the 23.1 percent rise in inflation is over and above that of the 28.2 percent rise in January. And with the domestic gas companies seeking yet another raise in tariffs the general public’s satisfaction quotient is extremely low.
This raises two questions: Why Pakistan, legitimately referred to as a perennial IMF borrower since 1965 with only brief periods of abstinence, has been unable to break its dependence on borrowed funds in general and on IMF in particular (given the on average three-year cyclical severe balance of payment chokehold that necessitates a Fund programme)? Are the standard Fund prescriptions a design flaw when applied to Pakistan?
Pakistan joined the IMF in 1950 and on 8 December 1958, one month and eleven days after Ayub Khan’s coup on 27 October 1958, secured its very first 25,000 dollars SBA, which was terminated without any withdrawals. The second loan was approved on 16 March 1965 and the ongoing nine-month long 3 billion dollars SBA approved by the Fund Board in July 2023 is the twenty-third Fund programme (with the next one already under discussion with the Fund team).
The Fund loans are rigorously monitored to ensure that the agreed time-bound quantitative conditions and structural benchmarks are implemented and since July 2019 Extended Fund Facility (EFF) approval, the Fund’s conditions have become considerably harsher and upfront with bilaterals (including friendly countries) making any pledged assistance contingent on being on an active Fund programme.
Out of a total of 23 programme loans twelve programmes (52 percent) were suspended by the authorities with the total loan amount not withdrawn.
The reason for the withdrawal was easing of the balance of payment crisis and the objective was to preserve the socio-economic status quo (denigratingly referred to as pervasive elite capture of not only the annual budgeted government expenditure but also the source of revenue).
The date of these 12 arrangements are: 18 May 1972, 24 November 1980, 2 December 1981, 28 December 1988 (SBA and Structural Adjustment Facility Commitment), 16 September 1993, 22 February 1994 (EFF and Extended Credit Facility), December 13 1995, 20 October 1997 (EFF and Extended Credit Facility), and 6 December 2001.
There were six programmes post-dating 2001 with only two that were fully withdrawn: (i) Extended Credit Facility approved on 6 December 2001 (9/11 was the same year), but which has no outstanding dues; (ii) and an EFF on 4 September 2013 with the amount fully withdrawn but with a hefty 3.793 billion SDR outstanding. Needless to add, the completion of the programme was at a time when flawed economic policies were being implemented (from artificially controlling the exchange rate with severe negative repercussions on the current account to relying on foreign borrowing on the premise that as interest rates were lower abroad than in country it was preferable to borrow from abroad which in turn remains a major contributor to external indebtedness today). In this context, the IMF was clearly more at fault than the then Finance Minister Ishaq Dar for releasing the tranches in spite of the patently flawed policies; and (iii) in the documents relating to EFF dated 3 July 2019, the IMF accused Pakistani authorities of never implementing the agreed reforms in the previous programmes and thereby justified the harsh upfront conditions as well as leaving the onus of securing loans from friendly countries on Pakistani authorities. The outstanding amount of this loan is 1.044 billion SDR as the entire amount was withdrawn from the approved 4.268 billion SDR.
It is evident that the Fund was too lenient in granting waivers to Pakistan and ignoring flawed policy decisions pre-2019 loans. Dar’s decision to artificially control the rupee dollar parity during the 2013 EFF was footnoted in a one of the reviews (a placement that reflected a deliberate attempt to de-emphasize the policy flaw) with the conclusion that the rupee was overvalued from between 5 to nearly 20 percent - a range that at best showed lack of expertise. From 2019 EFF onwards the IMF’s stance underwent a 180 degree turn.
Three Pakistani finance ministers, (Shaukat Tarin, Miftah Ismail and Ishaq Dar) used to the Fund’s pre-2019 approach failed to take cognizance of a dramatic change in the Fund’s approach to Pakistan that led to delays in reaching an SLA at great cost to the economy.
The Fund-Pakistan relationship has changed from one of accommodation in granting waivers to one of minimal, if any, accommodation at all yet what is disheartening is the fact that neither has the Fund changed its programme design to better align it with Pakistan’s prevailing conditions nor have the authorities proffered alternate proposals more suited to these very conditions.
This is noticeable in three major counts: (i) the focus dating from the 2019 EFF has been on primary instead of budget deficit which has implied a disturbing rise in domestic borrowing (thereby crowding out private sector borrowing with a significant adverse impact on growth) to fund the 26 percent rise in the budgeted non-development current expenditure – the 2023-24 budget was approved by the Fund; (ii) insisting on privatization without stipulating a study to determine whether any existing large subsidy will be continued due to a long-standing government policy (example is the tariff equalization policy as applied to the privatized K-Electric with 171 billion rupees budgeted under this head in the current year) and whether the target entity will operate as a monopoly with a penchant for maximizing profit through raising the rate applicable to consumers; (iii) improved governance which if the focus is on changing the board members or the CEO has nine times out of ten proved ineffective; and (iv) referencing a change in the constitution allowing a revisit to the 2010 National Finance Commission award and allowing FBR to collect farm tax at the same rate as the salaried class. The focus must instead be not as much on raising the tax to GDP ratio to 11 percent next year but to ensure that the direct to indirect tax ratio shifts and collections under direct taxes comprise at least 60 percent of total collections.
To sum up, there is an urgent need for IMF’s Resident Office to engage in tailoring prescriptions not to the standard normal conditions but to Pakistan’s unique economic scenario while the government team must include economists with capacity to identify the lacunas in existing policies that may account for an IMF policy prescription to have serious negative repercussions at worst and be ineffective at best.
Copyright Business Recorder, 2024