In an opinion piece in this paper, while reflecting on the incipient financial crisis emanating from an imbalance in the external account, Dr Hafiz Pasha has opined that 'the IMF Staff Mission not only colluded in accepting the manipulated statistics but also generously accepted the violation of many performance criteria and structural benchmarks. Consequently, little structural reforms were implemented during the tenure of the programme. Within one year after completion of the Programme, the underlying weaknesses of the economy have come to the surface'.
Dr Pasha is a former professor of this writer and therefore he is held in high deference and esteem. He has always encouraged differences in thought based on professional considerations. It is in this spirit that we would respectfully differ with his views regarding the success of IMF programme.
At the outset, let us look at the charge of Dr Pasha regarding IMF Mission colluding in accepting manipulated statistics. This is a very grave charge. It is difficult to maintain that this is an objective view. The word 'collusion' in essence is a pejorative term, and connotes a disapproving act. It means 'conspiracy', 'connivance', 'complicity' 'intrigue', 'scheming', 'plotting', 'secret understanding' and the like. In all these meanings, the aim is to deceive those who are not part of collusion. We wish he had supported such a charge with specific evidence, which was not provided.
The IMF programme is not a document of deception. Whatever is negotiated and the conditions applicable are fully disclosed initially to the Board of Directors of the Fund and subsequently to the general public by allowing the Fund Staff to make the Memorandum of Economic and Financial Policies (MEFP) and the Staff Report public within a day of Board discussion. Indeed, finance minister Ishaq Dar gave an instruction to the Ministry of Finance to disclose the document on its web site also.
More importantly, all information submitted to the Fund are fully authenticated and certified by authorities on the manifest understanding that any misrepresentation would entail cancellation of Fund programme and immediate withdrawal of disbursed assistance that may have been released based on the basis of misleading information. There was no such thing done by Pakistan.
The charge of collusion is levelled in connection with data manipulation. Dr Pasha has been labelling the charge of data manipulation for quite some time now. There is no truth in such accusations, even when he may have strong logical basis to suspect this. The reason is that Dr Pasha is expressing only suspicions and not facts, which are only gathered and compiled by the statistics offices in the federal and provincial governments. It serves no one's interest to malign government statistics that are based on internationally accepted best practices under the auspices of UN as well as Bretton woods institutions. The data is collected and compiled by independent statistics offices, which has always been the case. The present governments - both federal and provincial - have done nothing new in the way these organizations are run and there is no reason to believe that any one of them would connive with political leadership to misrepresent statistics.
We now turn to the other indictment namely 'generous acceptance of violations of performance criteria and structural benchmarks'. While Dr Pasha has the liberty to hold such a view, the facts are again not supportive of such an assertion. The country rendered solid performance under the programme and earned the unique honor of completing the first ever three-year programme, and that too under a democratic government. This achievement cannot be belittled by saying that it was contrived by securing or granting undue waivers under the programme. Previously also, Dr Pasha routinely criticized grant of waiver by the IMF Board. Well, this was not done as a favour. Waiver is part of the approved methodology for carrying out a review under the programme. None of the waiver was a give-away on the goodwill of the Mission, as alleged. Factsheet on IMF Conditionality describes the process of waiver of a Quantitative Performance Criteria (QPC) as follows:
If a QPC is not met, the Executive Board may approve a formal waiver to enable a review to be completed, if it is satisfied that the programme will nonetheless be successfully implemented, either because the deviation was minor or temporary, or because the country authorities have taken or will take corrective actions.
Waiver, when required, was carefully examined as to its causes, its state in the following quarter, and, if required, agreement on adoption of corrective measures before presentation to the Board. Once satisfied, the Mission would first recommend completion of review to its Management and, after their approval, to the Board, which has the ultimate authority to approve. Evidently, this is a fairly involved process involving multiple layers of approvals and cannot be done on the sweet will of a Mission Chief.
In the case of structural benchmarks, there is no equivalent notion of waivers, but rather timings of completing specific measures are adjusted whenever warranted by the circumstances. The programme had an unprecedentedly rich agenda of reforms that Pakistan agreed to implement. There was an overwhelming performance in implementing those structural benchmarks. In the three-year period, we implemented 51 structural benchmarks (including such landmark actions as elimination of SRO regime, improved public debt management, rationalization of gas and electricity tariffs etc.) and covering such sectors as fiscal, monetary, banking & finance, trade and energy. Of these, 22 structural actions required legislative efforts, of which 14 required enactment of full laws (including Securities Act, Futures Act, Electricity Conservation Act, PIA (Corporatization) Act, Corporate Rehabilitation Act, Deposit Insurance Act, Credit Bureau Act, GIDC Act, etc.), while 8 required amendments in existing law (most notably establishment of monetary policy committee under the SBP Act). Having implemented such vast agenda of structural reforms, there were indeed a few disappointments as the government changed course on some policy commitments, particularly relating to divestment of public sector enterprises even though the required actions to prepare the transactions were taken on time.
We finally turn to Dr Pasha's assertion that 'within one year after completion of the Programme, the underlying weaknesses of the economy have come to the surface'. We have no disagreement with him on the precarious state of external account, which we have been underlining for some time now. But we would respectfully disagree with him on the fact that he makes no distinction between policy induced crisis and the underlying strengths of the economy. There was a deterioration in economic conditions primarily due to policy failures as opposed to anything structurally wrong, though, as we said earlier, there were some elements of the structural agenda with the Fund that were not fully implemented or a few reforms rolled back soon after the conclusion of the programme.
But the failure emanated from abandonment of fiscal discipline as the fiscal deficit reached nearly 6% from 4.3% a year earlier. Revenue collection was pathetic showing a growth of only 8.0%. The circular debt has begun to rear its head with the same ferocity as in 2013. This fiscal deficit translated into a very high current account deficit, which rose to 4.1% against only around 1% a year earlier. The unfortunate aspect was that rather than allowing the exchange rate to adjust, because of a financing gap, the government started using reserves to support the exchange rate and in the process ended up compromising the ultimate achievement of the programme, namely the highest level of reserves of nearly $25 billion.
The fact that we have a robust and buoyant economy is reflected in all leading indicators of growth, output in manufacturing and agriculture, low inflation, rising investments, increasing flow of credit to private sector at low interest rates and so on. The high current account deficit is good for growth, provided we have financing. But, we neither have financing nor did we allow the exchange rate to do its job, and hence the crisis that we are facing: entirely of our own making and not of any structural weaknesses in the economy.
(The writer is former Federal Finance Secretary. Email: waqarmkn@gmail.com)