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Pakistan-IMF negotiations

The chances of entering into a long-term arrangement will be dependent on the performance of the economy during the current financial year

Sep 18 - 24, 2000

There seems to be no major point of disagreement between the IMF and the current economic managers. However, the negotiations may take slightly longer time, despite the best efforts of both the parties, due to allegation of fudging of figures by the previous government. The IMF, in its own eyes, appeared a little foolish as its own audit, inspection and negotiation teams could not detect the disparity at an appropriate time. Therefore, this time the Fund is following a very cautious approach. Besides, approval of any funding is a time consuming process. The IMF, at present, is getting too many requests from those countries who have better track record high crude oil price being the single largest reason.

Theoretically, the three basic factors influencing the negotiations are in Pakistan's favour. These are: pace of privatization process, trade and budget deficit and fiscal controls. One should look first at the pace of privatization. Pakistan has been outside the IMF funding programme, influencing fund flow from other multilateral lenders, since May 1998. No achievement could have been made on this front despite the best efforts of the GoP. However, the keen interest of foreign investors in the bidding of LPG business of SSGC, PSO and SNGPL provides clear signals that Pakistan can still attract attention of globally recognized players.

As regards trade deficit, despite slow growth in exports, the balance of trade would have not been all that adverse had prices of crude oil not sky rocketed. Pakistan is still current on all its debt servicing. However, the central bank was able to contain exchange rate volatility. One may not appreciate such policies, but if a country faces precarious forex reserves position it has to opt the lesser evil to stop the economy from complete disarray.

The budget deficit may look slightly on higher side. However, the efforts of current economic managers deserves some appreciation. Previously, only half hearted efforts were made to expand the tax net and much of the shortfall in CBR-revenue was compensated by maximizing the collection under development surcharge on POL products. Not only that now efforts are being made to enhance tax collection and minimize dependence on this surcharge, controls are being applied to contain non-developmental expenditure.

An important question often been asked is, under what arrangement the IMF would release the funds and what will be the quantum? Some analysts consider such questions totally irrelevant, at least for the time being. Pakistan needs the funds immediately and if it succeeds in entering into an arrangement the expected inflow would be more than US$ 1.5 billion part of this will come from the IMF and remaining from other multilateral lenders. The IMF has successfully brokered the rescheduling of Pakistan's external debts in the recent past.

It is also necessary to understand that the arrangement being discussed with the IMF are only for the current financial year. Pakistan will have to make efforts to enter into a long-term assistance programme with the IMF. The main purpose of assistance from the IMF in the past was to support the countries suffering from adverse balance of payments situation. However, the new policy being pursued by the Fund is aimed at poverty alleviation. Therefore, Pakistan would also get the support under Poverty Reduction and Growth Facility (PRGF) a new programme initiated by the IMF.

It may not be wrong to say that the current economic managers, along with negotiating the present arrangement, are working on to qualify the maximum fund flow under the proposed programme. Most of the policies being followed by Pakistan at present are aimed at achieving higher GDP growth rate, bridging the gap between the real income of various groups and initiating poverty alleviation programme. At the same time efforts are being made to increase unit price realization of export commodities and rationalize imports. However, there is a word of caution that such policies do not yield immediate results. They yield results in 18 to 24 months.

Entering into the funding arrangements with the IMF may not be an easy task but successfully negotiating rescheduling of external debts, once again, will be a mammoth task. It should be very clear in the minds of economic managers that Pakistan needs another rescheduling of its external debts. It has become all the more necessary due to persistent increase in crude oil price.

The sky rocketing of crude oil price has already initiated recesssionary trend even in most of the developed countries. This would have an even higher negative impact on Pakistan. Firstly its imports would bulge and secondly its exports would decline resulting in higher trade deficit. Therefore the efforts should be to: minimize the adverse impact of high crude oil prices, maximize production and productivity to remain cost competitive.