We have been stressing in these columns for the last one year or so that Pakistani authorities would be obliged to negotiate another programme with the IMF with strict upfront conditionalities to deal with the crisis developing in the external sector. It seems that we were not very much wide off the mark while pointing out such a possibility.
Talking to the media after the conclusion of negotiations with Pakistan on 18th January, 2013, Jeffery Franks, the regional advisor to the Fund on Pakistan did not mince words about the state of economy. According to him, future funding to Pakistan will be linked to "broadest and deepest" political support for upfront economic reforms and policy changes to prove the government's seriousness. It was also made abundantly clear that so far Pakistan had not requested for a new programme, but if such a request was made, the disbursements would follow prior policy actions for macroeconomic stabilisation. To emphasise his point further, the Advisor stressed that the IMF mission could only support a new programme before the Fund's management and its Executive Board when right policies were there to prove that authorities had taken steps towards achieving macroeconomic stability. Another important point that appeared to have emerged during the interaction with journalists was that a new loan programme could most probably materialise during the tenure of the interim government to be put in place with consensus among major political parties.
The economic situation of the country, according to the IMF assessment, is dire at present. Budget deficit during FY13 has been projected at 7.5 percent of GDP or Rs 1.624 trillion, growth rate at 3.5 percent and current account deficit at 0.7 percent of GDP. The real issue in the external sector is that there are not sufficient resources even to finance this small deficit. Pakistan needs to take a combination of steps in the power sector and fair enforcement of taxation measures to bring down fiscal deficit to 3.0-3.5 percent of GDP in two to three years. Inflation also needs to be brought down on a sustainable basis while foreign exchange reserves must rise to $15 billion mark. This would require a lot of macroeconomic adjustments through removal of bottlenecks including reforming the energy sector, restructuring of PSEs, improving business climate and strengthening and simplifying tax system. The energy sector could be the starting point for upfront policy adjustments through a combination of technical efficiency, controlling theft and improving generation mix. For a fair and transparent tax system, agriculture, services, and retail business needed to be brought into the tax net while exceptions allowed through different SROs and other legal or illegal instruments are needed to be withdrawn. The size of the new programme could range between $4 and $5 billion and this has to be complemented by boosting capital inflows from other sources.
The briefing by the IMF Advisor about the current status and progress of negotiations with Pakistan tells a lot about the Fund's strategy to deal with the country when a request is made for another programme, which may not be far off due to relatively low level of foreign exchange reserves available with the State Bank at this point in time. The general impression in this connection that the visiting IMF team was in Pakistan only for post-monitoring of the earlier SBA does not appear to be correct because a lot of ground seems to have already been covered in relation to a new programme as revealed by the mission chief. Also, contrary to the belief in certain circles, it needs to be remembered that under the IMF rules, the repayment instalments due on the SBA availed earlier can neither be restructured nor postponed and the country has to honour its payment obligations in time (however, funds received under a fresh programme can be used for existing loan repayments). Coming to the analysis of the current situation by the IMF mission chief, it is difficult to deny the veracity of his observations. The country definitely faces a lot of problems in almost every field. For instance, Pakistan needs to accelerate its GDP growth rate by removing energy shortages, improving law and order situation etc to a respectable level of around 6 percent, reduce its budget deficit to a figure between 3 and 4 percent of GDP, make its monetary policy forward looking to bring down inflation rate to 5 percent or so, and balance its current account in a way so that the deficit, if any, could be filled through autonomous inflows. The reforms suggested in each area are also quite relevant to the situation and need to be undertaken for ensuring macroeconomic stability. Those who think that the IMF always prescribes harsh measures and makes the lives of ordinary people more difficult are wrong. The fact of the matter is that countries like Pakistan approach the IMF when risks to the economy have grown to an extent that extraordinary measures are needed to avoid the impending crisis. The mission chief has alluded to upfront conditionalities a number of time in his remarks due to the seriousness of the situation and low credibility of the country in pursuing agreed reforms earnestly in the past.
However, authorities of the country need to evaluate the current overall economic situation independently before entering into serious negotiations with the Fund about a new programme. In our view, the unfolding external account situation of the country, which is generally the reason to seek a bailout package from the IMF, though not satisfactory, is not alarming either, at least as yet. In fact, current account of the country has posted a surplus of dollar 250 million during the first half of FY13 on the back of receiving much-needed foreign inflows under the Coalition Support Fund (CSF) and record growth in overseas workers' remittances in sharp contrast to a dollar 2.43 billion deficit in the corresponding period of last year. Yes, we need to have foreign exchange reserves equivalent to three months of imports (between dollar 14 billion and dollar 15 billion) but looking at our past record, dollar 9 billion presently held by the State is not such a low level as it could keep us afloat for another year or so. As such, the real focus of the new arrangement should be a reduction in budget deficit to a sustainable level and the country urgently needs a very bold stabilisation programme in this particular area with or without the support of the Fund. For this, the country has to own the next programme and not behave as it has been forced by a hostile institution with some ulterior motives. If this was the approach, it would become immaterial if the new programme was signed by an interim set-up or a political government formed as a result of vote. At present, there clearly appears to be divide between the fiscal and monetary authorities in the country. Ministry of Finance appears to favour a programme now - while the Governor SBP sees no imminent crisis and feels the situation is manageable until June of this year. This newspaper would have liked to see a stabilisation programme in place as of November. The reason is simply the unpredictability of international oil prices. Further, even if the import price of crude oil and deficit POL products fall, the quantum of country's energy needs will go up with import of LNG and LPG. Therefore, there will be pressure on BoP which is not there at present. The present energy deficit is stifling growth. It needs to be doubled to take care of armies of unemployed youth. We are also required to take certain administrative steps to curtail line losses and force consumers to continue paying for the theft plaguing the system. The present government will be replaced by a caretaker set-up and a new government will be there post-election. It is extremely important for this 'transition' to be managed properly. The last caretaker set-up, which was headed by Mohammadmian Soomro, earned scathing criticism for its failure to act as an interim government better co-ordinated to serve country's economic interests. Therefore, political parties at the centre and in the provinces need to reach consensus on a three-year macroeconomic stabilisation programme now - with or without the Fund - for a country where people were and still are generally uninformed, disorganised and disconnected.
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