Should existing economic policies of the Khan administration be a source of comfort to the multilaterals? Two statements made by the International Monetary Fund's (IMF) Managing Director Christine Lagarde compel one to respond in the negative.
On 11 October 2018 Lagarde stated that the Fund would "need to have a complete understanding and absolute transparency about the nature, size, and terms of the debt that is bearing on a particular country," an unambiguous reference to the international perception that a Fund package would be used for interest/repayment on loans acquired under the China Pakistan Economic Corridor (CPEC). Pakistani authorities recently acknowledged that they had shared only around 50 percent of financing in CPEC projects with the IMF mission in November 2018. Since then there has been considerable assistance from "friendly countries" in the form of loans (in excess of 8 billion dollars with 4 billion dollars already parked with the State Bank of Pakistan) as well as extension of the period of some repayments due under CPEC, however, while the prospect of default has been staved off till the end of the current fiscal year the need for a bailout package to carry out macroeconomic stabilization policies remains.
On 10 February 2019 subsequent to Lagarde's meeting with Prime Minister Imran Khan in Dubai the Prime Minister tweeted: "in my meeting today with IMF Managing Director Christine Lagarde there was a convergence of our views on the need to carry out deep structural reforms to put the country on the path of sustainable development in which the most vulnerable segments of society are protected." He did not provide any details of the precise nature of these reforms though his supporters insisted that his statement reflected IMF's support for all the policy decisions taken by his administration so far. One would have expected these loyalists to be disabused of their flawed perception as Lagarde's statement uploaded on the Fund website the same day as the meeting noted: "I reiterated that the IMF stands ready to support Pakistan. I also highlighted that decisive policies and a strong package of economic reforms would enable Pakistan to restore the resilience of its economy and lay the foundations for stronger and more inclusive growth."
Those who have engaged with the IMF in the past, either from the government side, as an IMF staff member or as an analyst, the thrust of the IMF statement is clear and unequivocal: (i) IMF stands ready to support Pakistan does not imply at whatever conditions dictated by the Pakistan authorities; it merely restates the IMF mandate which is to assist member countries struggling with massive macroeconomic instability issues. Pakistan at present has a current account deficit comparable to the first six months of a year ago, and this in spite of nearly 35 percent depreciation of the currency; (ii) 'deep structural reforms' reflect very serious concerns about the state of the economy particularly with respect to falling revenue and rising current expenditures which, if not dealt with on an emergent basis, would lead to an unsustainable budget deficit of over 7 percent by the end of the current fiscal year; (iii) Lagarde is referring to the 'restoration' of the resilience of the economy which does not remotely suggest that the two amendments to the finance bill 2019 passed by the national assembly meet with the Fund approval - the first amendment of the bill raised reliance on unrealistic revenue gains resulting in lower absolute tax collections during the first six months of the current year and the second amendment would raise government expenditure widening the deficit; (iv) macroeconomic stabilization must lay the foundation for stronger and inclusive growth - stronger growth must post-date shrinking the unsustainable budget deficit; and (v) the IMF chief, a diplomat, gave a face saving to the Prime Minister as she concluded that "as emphasized in the new government's policy agenda, protecting the poor and strengthening governance are key priorities to improve people's living standards in a sustainable manner." The Fund, together with other multilaterals, supports the Benazir Income Support Programme (BISP) given that the beneficiaries were scientifically identified with World Bank assistance but is opposed to incentives including lower tariffs provided separately to small consumers as it rightly claims these are not targeted.
It is highly unlikely that the Fund would support yet another tax amnesty scheme, which is reportedly under consideration. In the second review under the extended fund facility dated March 2014 it was noted that: (i) the package (amnesty scheme) "seeks to improve the investment climate through reducing tax liability" (a major component of the second amendment finance bill 2019) maintaining that it "opens another loophole in the system in addition to the ones that already exist for remittances and equity stock investment, and raises potential money laundering risks. The immunity from routine audit hinders the self assessment process, and the amnesty - entailed by waiving penalties and interests - is likely to be detrimental to improving compliance and collections as tax payers will develop an expectation of future immunities;" (ii) a week ago the committee on privatization, under the chairmanship of finance minister Asad Umer, decided to privatize nine entities in the next two years, with two in the power sector notably RLNG-powered 1,223 megawatts Baloki Power Plant and 1,230MW power station at Haveli Bahadur Shah. This decision would be fully supported by the Fund and may have been taken to appease the Fund's concerns with respect to declining revenue and rising expenditure however the government is likely to face three major lacunas in the implementation of this commitment: first, given the recent downgrade in Pakistan's rating by Fitch and Standard and Poors, the time is not propitious for the sale and may leave it open to charges of selling the family silver at throw-away prices; second, worker resistance is a certainty though not in the case of the two power plants that were targeted for privatization in 2016 as soon as their construction was completed (2018); and finally the Fund may insist on privatization as a pre-programme condition given the sustained lack of compliance on the agreed privatization plan by previous administrations.
To conclude, there is going to be many a slip between the cup and the lip, the cup being the IMF bailout package (and it would release budget support from other multilaterals/bilaterals instead of going back to the friendly countries for more assistance next fiscal year), and the lip referring to the failure of the Khan administration's economic team to understand that with each week's delay in procuring the bailout package macro-economic instability issues are compounding as they are not being dealt with; additionally the Fund conditions, pre- and during programme, would include ever stronger structural reform measures for the government relative to today with a greater negative outcome on the poor and the vulnerable.