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Why incumbent government is reluctant in approaching IMF?

It is becoming a serious cause of concern for Pakistanis that the incumbent government is borrowing foreign exchange at far higher interest rates as compared to the rate charged by the International Monetary Fund (IMF). While the ruling junta continues to say that the country can live without the crutches of IMF, independent observers are of the consensus that avoiding the ‘lender of last resort’ is plunging the country deeper into the balance of payment crisis. The incumbent government knows very well that IMF will certainly offer a bailout program, which will not be free from certain stringent conditions. Therefore, an illusion is being created and those who tend to differ with this rationalization must read the most recent IMF of Pakistan dispassionately.

Recently, the IMF has expressed serious concerns over Pakistan’s deteriorating macroeconomic situation, the most contentious issues being widening external and fiscal imbalances, eroding foreign exchange reserves and emerging risks to economic and financial stability. The IMF has advised the Government of Pakistan to immediately focus on near-term policies to preserve macroeconomic stability and restore fiscal discipline to minimize risks and economic distortions. The Fund has also expressed concerns over the medium-term debt sustainability and called for additional revenue measures and containing expenditures.

While the critics have been warning the PML-N led government about lavish expenditures, the ruling junta insists that the money is being spent to accelerate the GDP growth rate. Some cynics highlight concerns about the prevailing economic scenario. They have two serious concerns that: 1) the benefits are not evenly distributed as rich are getting richer poor are getting poorer and 2) a large percentage of is being pushed below the poverty line. The government is never tired of claiming growing number of cars and motor cycles but completely forgets that people are forced to purchase two or four wheelers due to vanishing public transport. Over 10% of country’s population lives in Karachi, which is completely devoid of a decent public transport.

In the latest review, IMF has warned about continued erosion of macroeconomic resilience, which is likely to expose the country to greater threats. The Fund has clearly emphasized the need for prudent debt management and cautioned to assuming new external liabilities diligently. It has also emphasized immediate tackling of rising fiscal risks stemming from continued losses by the public sector enterprises. Despite privatization, many of state-owned entities swallow nearly Rs3 billion per day and the real culprits are PIA and Pakistan Steel. Added to these are state owned power generation and distribution companies. Ever since coming into power PML-N government has spent over Rs2 trillion in the name of resolution of circular debt but the problems persists. The government has failed in containing blatant theft of electricity and gas, going on with the connivance of staff of utility companies.

The IMF estimates real GDP growth at around 5.5 percent due to improved power supply, investment related to the China-Pakistan Economic Corridor (CPEC), strong consumption growth and ongoing recovery in agriculture. However, significant fiscal slippages last year and current year, estimated around 5.5 percent of GDP, hint towards a higher deficit ahead of upcoming general elections. Surging imports have led to a widening current account deficit and a significant decline in foreign exchange reserves despite higher external financing.

The Fund has stressed the importance of greater exchange rate flexibility on a more permanent basis to preserve external buffers and improve competitiveness. The Fund also wants the authorities to phase out administrative measures aimed at supporting the balance of payments as soon as conditions allow them to minimize potential economic distortions. The external sector pressures are linked to the fiscal deterioration during the last fiscal year and an accommodative monetary policy stance, as well as high imports related to the CPEC projects.

The authorities have been asked to further strengthen fiscal discipline through additional revenue measures and efforts to contain current expenditure while promoting pro-poor spending. The Fund has complemented the recent increase in the policy interest rate and also expressed hopes that further monetary tightening would be undertaken to address inflationary risks and help reverse external imbalances. However, many analysts don’t support IMF recipe.

Many of local analysts raised concerns about the recent setback at the Financial Action Task Force. One of the key concerns remains money laundering and terror financing. The IMF also advised the authorities to improve the business climate, strengthen governance, achieve cost recovery in the energy sector and expand social safety nets to protect the most vulnerable.

Because of substantially higher credit outstanding, the borrowing Pakistan faces closer monitoring of the policies and undertake more frequent formal consultation with the Fund. The particular focus should be on macroeconomic and structural policies that have a bearing on external viability. Importance of strengthening Pakistan’s fiscal discipline through additional revenue collection measures and proactive efforts to curb current expenditures slippages are a must, irrespective of the fact Pakistan approach or does not approach the lender of last resort.

The government must pay attention to the key recommendations made by Fund that include: 1) aggressive structural reforms, 2) strengthening fiscal federalism, 3) enhancement of AML/CFT regime, 4) improved business climate, 5) elimination of circular debt and 6) containment of continuous losses in SPEs. It is ironic that the outsiders are suggesting the corrective measures, but the policy planners and concerned authorities seem least concerned.

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