The Fund program has finally been negotiated. However, it is only a milestone in the tortuous road to success. What would it take to successfully traverse the distance? We would reflect on this question. Getting a program is not a guarantee for its successful conclusion. Pakistan doesn't have an enviable record of completing the programs.
In the 1990s, we had earned the infamous distinction of being a 'single tranche country'. Most of the programs during that period didn't survive beyond a couple of reviews. In 2000 and 2003, both programs met with near success. In 2008, we returned to the old habits and only 4 reviews were completed. The last program 2013-16 is the solitary example of successful completion.
What would it take to sail through the 39-month and twelve reviews under the program? A relentless focus and continuing belief that going off track is not an option. Would it be possible for the government to display such determination on a consistent basis? We discuss this aspect in the context of the dangers that typically surround the working of the program.
At the outset, we are a bit surprised that the program was not accompanied with the euphoria that is normally witnessed on the occasion. The announcement of the program was not arranged through a press conference. The Advisor Finance gave a short interview to the PTV where he announced the successful conclusion of the staff level agreement. The IMF issued its standard press release from Washington. Both of them were economical in giving away the details of the understanding reached under the program.
The markets initially reacted positively but soon gave way to continuing dejection as there was scarcely little in these announcements to cheer about. Pakistan Stock Exchange shed more than 800 points or 2.5%. The exchange rate was stable in the beginning but then a rupee was lost during the day. The following day the market losses were contained but rupee remained unstable. On Wednesday, the market showed some gains but rupee lost another two-three rupees and was generally reported to in short supply, an indication of uncertainty that continued to grip the forex market. In a surprise move, the Prime Minister held a meeting with forex dealers who were warned of consequences if they took advantage of market conditions. A band of Rs.143-44 was agreed for exchange rate in the open market. Shockingly, the following day, the inter-bank market, which so far was stable, should major sliding as on some trades as much as Rs.6 were lost. This development has raised many doubts regarding coordinated action on economic front.
Clearly, there is continuing communication gap between the economic managers and the market. Without having the information about the contents of the program, analysts, media anchors and talk-show participants were free to read their own meanings in the press release; some claimed access to classified information. Much of it was not a favorable discourse regarding the efficacy of the program.
This is not a good start for the program. Even such trivial information as to when the prior actions would be completed, when the program would be taken to the IMF Board and whether a sizable disbursement would be made upfront were missing. The modest amount of support of $6 billion was also a surprise. This is the reason why the announcement has not generated confidence and failed to remove uncertainty immediately.
Having said that, we are of the view that IMF program is a major event that the economy was in need of for more than a year and therefore should be welcomed. It has the potential to transform the sagging fortunes of country's economy. Based on the limited information available, some commentators have expressed reservations on the quality of the program. This is a premature assessment and not based on sound information.
It is necessary that the program is implemented in earnest. Economic dynamics of any economy are unpredictable. Even a faithful implementation of the program is not a guarantee that the turbulence in the economy would be corrected immediately. Mercifully, the conditions obtaining in Pakistan are not as challenging as those faced by Egypt or Argentina, yet in country's history we have not faced as grave challenges as we are facing today. Under the circumstances, the program would be tough but it would face two distinct dangers. First, we may fall short on implementation and, second, the economy may not rebound as quickly as one would hope.
The first danger can be averted by government's commitment in implementation that we have underlined above. The second danger would be averted as soon as we restore the trust of markets and people. The Prime Minister and his team have to defend the program and garner people's support behind it. Efforts should also be made to forge a bipartisan consensus on the necessity and utility of the program. Economic managers should reach out to business and markets to shore up their support and confidence.
The details of the program would unfold on three occasions. First, in the forthcoming monetary policy committee meeting toward the end of May. Any action on the policy rate would be taken to be a prior action. Markets are wary that despite a significant positive real interest rate, the Fund may have asked for further adjustment on account of forward looking policy and arguing that there is plenty of inflation in the pipeline. This should be minimized; a 200-pbs adjustment, as rumored, would not be welcomed.
Second, the announcement of the budget around second of June would have the most of actions particularly on account of taxation. People are building expectations and various estimates are taking rounds. That this would be sizable, is understood. How distortionary would it be remains to be seen. Measures based on removal of exemptions and broadening the base would be welcomed whereas increase in tax rates would be painful. Measures on expenditure rationalization and adjustment in utility prices would also be unveiled around that time. Fiscal adjustment to bring down primary deficit to 0.6% of GDP would be the main requirement.
Finally, the exchange rate adjustment is a slightly complex enterprise. If the program has admitted that some upfront adjustment is required, it would be accomplished in the context of market purchases of FX by the central bank. However, the volatility witnessed in the last two days will not be helpful in bringing stability in the market.
It is in this backdrop that we see some evolving difficulties the Government is facing in implementing the program. Tentativeness and diffidence would not inspire market confidence and remove uncertainty. Only clarity, focus and relentless determination to succeed would make the difference.
(The writer is former finance secretary)
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