Pakistan: IMF deal must not lead to complacency

As expected, the Executive Board of the International Monetary Fund (IMF) approved on 4th August 2013 a three-year arrangement under the Extended Fund Facility (EFF) for Pakistan amounting to dollar 6.68 billion or 425 percent of the country's quota to help the country forestall a balance of payments (BoP) crisis, rebuild foreign exchange reserves and support its economic reform programme to promote inclusion growth. The approval of the loan enables an initial disbursement by the IMF of about dollar 544.5 million while the remaining amount will be evenly distributed over the duration of the programme, subject to the completion of quarterly reviews. According to the Fund, the programme, among other things, is expected to help the economy rebound and reduce fiscal deficit; it is also aimed at enabling government to undertake comprehensive structural reforms to boost investment and growth. Adherence to the programme was also expected to catalyse the mobilisation of resources from other sources. Deputy Managing Director of the Fund, Takatoshi Kato, asserted that "by providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country's improved macroeconomic prospects." Despite the challenges it faces, Pakistan is a country with abundant potential, given its geographical location and rich human and natural resources. The Fund has also noted that Pakistani authorities have already taken some difficult decisions to achieve the intended objectives of the programme. Some of the prior actions included an understanding between federal and provincial governments on a budget surplus as the 18th Constitutional Amendment and the 7th NFC Award have shifted the tilt of resources from centre to the provinces, issuance of notices to at least 10,000 new potential taxpayers to broaden the tax net, subsidies in the power sector have been targeted to those using up to 200 units while effective measures are being taken to curb electricity theft and recovery from defaulters to reform the entire power sector. Approval of the EFF by the IMF at this critical juncture is undoubtedly a major event for the economy of Pakistan. Keeping in view the payment obligations of the country, particularly to the IMF, the threat of default was imminent as foreign exchange reserves held by the State Bank of Pakistan had dwindled to only dollar 5 billion or equivalent to about 5 weeks of inputs. A significantly large amount sanctioned by the IMF coupled with expected flows from other sources would help the country to plug the huge gap in the external sector accounts and increase or stabilise the foreign exchange reserves of the country around the present levels. Obviously, concessional loans of such a magnitude were not possible from other sources. The real benefit of the programme, however, will be the expected restoration of macroeconomic stability through tightening of fiscal and monetary policies in a manner that would ensure social stability and extend support for the poor during the adjustment process. By entering into a proper arrangement the Fund and Pakistani authorities have sent a strong signal to the donor community and foreign investors about country's determination to improve its macroeconomic prospects by following appropriate policies. Given the present state of the economy, particularly the alarming situation in the external sector, disruption in foreign trade with all its hazardous consequences and meltdown of the economy was a real possibility. However, it needs to be noted that the Fund staff this time has put more emphasis on highlighting the bright aspects of economy to make a favourable case for Pakistan. For instance, Pakistan had always abundant potential due to geographical location and rich human and natural resources but failed to exploit these resources to improve its economy. One, however, fails to understand how it is going to be different this time. Also, this is the 16th programme that Pakistan and IMF have agreed to since 1958 but the authorities of the country have mostly been lacking in resolve and unable to unshackle the economy from the dependency syndrome. This needs to change because the mood of multilateral institutions, including the IMF, can change fairly quickly, depending in particular on the US stance, which is the largest shareholder in these organisations. Therefore, instead of asking for waivers during the programme, it would be better to own the programme and adhere faithfully to Fund's conditionalities to achieve the targeted goals. This is particularly so because the programme has been agreed after mutual consultations and designed to attain a sustainable position in various sectors of economy. Finance Minister Ishaq Dar has been insisting that the EFF programme is homegrown and largely designed at our terms; but he has to work very hard to do the needful and prove that he could succeed where others have mostly failed. He must not become complacent over any success. Macroeconomic objectives of the programme revolve around the country's weakest points and it would take a lot of courage and resolution to undertake policies to achieve the targeted goals. The Finance Minister has kept his word. The Ministry of Finance has released a Letter of Intent (LoI) along with a "Memorandum on Economic and Financial Policy for 2013/14-2015-16" on the Ministry's website without waiting for the Fund to do so. With uncertainty rampant around us, it would be difficult, if not hazardous, to speculate on the likely contours of the upcoming Monetary Policy Statement (MPS). However, the PML (N) government has taken some tough but realistic measures with regard to utility tariff and POL prices. These hikes are bound to put pressure on the price line this year. Further, any laxity on the fiscal front will also add to pressure on monetary policy. The challenge for economic managers is to choose between orthodox steps or take risk. The IMF has been wrong on its core inflation estimates for Pakistan before and can be erroneous again. Local businesses fix prices on the anchor of PKR parity and not interest rate unlike the developed economies. A sharp depreciation of the rupee in recent days and weeks has unhinged the price line and stabilising it again is the challenge the present government faces. Aren't the matters that appear simple always complex?