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Implications of the IMF package

The IMF support is a significant breakthrough, for which economic performance was the main determinant

From Shamim Ahmed Rizvi,
Islamabad
Dec 11 - 17, 2000

The much awaited bail out package of the International Monetary Fund (IMF) has at last come through. The IMF Board of Directors has approved $596 million standby credit for Pakistan to save the country from possible default on its foreign debts and interest payment. Pakistan has already received 192 million dollars and the remaining over 400 million will be released by in two installments till June next year subject to conditionalities.

It is no more then a breather package not under the low interest ESAF/EFF or poverty reduction and growth management programme but under high interest short term standby arrangement to avoid default of low interest loan. The $596 million probation involving appraisal at 3 month's interval. It however, qualifies Pakistan to secure loans from the World Bank and the Asian Development Bank (ADB) and for a 10 month reschedulling of loans of about 1.6 billion dollars and London clubs which falls due next month.

The IMF had suspended its aid programme to Pakistan in May 1999 on the PML government's refusal to increase the POL prices, devalue the rupee, and to impose General Sales Tax across the board. The resumption of credit is a result of year-long talks between the IMF and the current regime, in power since October 1999.

The IMF's decision on the heel of the decision by the Asian Development Bank (ADB) last week to grant assistance of $250m to two enterprise projects, and of the comments last week by the World Bank's country director John Wall that the Bank, IMF, and ADB would extend all possible support to Pakistan, provided it dealt with its balance-of-payments crisis, low exports and reduced revenues.

As announced, the stand-by-credit is $1b short of the $1.6b figure mentioned by several government officials during their year-long negotiations. Despite the less than predicted figure, the very fact of a grant of the IMF credit will be interpreted domestically and internationally as a provisional vote of confidence in the economic management of the Musharraf government. The vote of confidence seems to have been made possible due to a decision by the World Bank and IMF managements to separate financial assistance from demands for restoration of democracy.

The IMF press release on the grant of credit, in turn, avoids any mention of the nature of the Pakistani regime. Since the Bank and IMF managements are, in the final analysis, directed by the advanced industrialized countries, it is clear the a collective western decision had been made that at least on the financial front. This was illustrated by explicit mention in the press release that: "In addition to IMF's stand-by-credit, Pakistan will be supported by financing from the ADB, World Bank, bilateral official creditors and the private sector. The Paris Club has agreed to consider in January 2001 rescheduling Pakistan's outstanding arrears and upcoming debt obligations".

On the economic front, however, it has been made clear that Pakistan would be required to follow a set of agreed conditionalities during the programme period. These are prescribed to restore the health of the economy and include parameters like budget deficit, monetary policy and external sector sustainability. If the straight and narrow path of adjustment is not followed, the programme is generally derailed. Unfortunately, our record in this respect is rather frustrating and does not inspire confidence. Most of the time, the programmes with the Fund were abandoned midway and Pakistan got the painful distinction of one-tranche country. The latest programme, $1.5 billion three-year Extended Structural Adjustment Facility (ESAF), arranged in early 1999 was terminated after May 1999 because Pakistan had failed to fulfil many of the conditionatities. The greatest set-back to credibility came when it was discovered that Islamabad had fudged the figures in an attempt to qualify for the Fund resources.

In a way, therefore, the faithful implementation of the present programme is not only crucial for getting a regular flow of foreign funds from various sources and revive the growth prospects of the economy, but it will also offer a perfect opportunity to regain the confidence of donors in our ability to undertake the needed prior conditionalities like free float of the rupee have already been implemented but the next phase would be more arduous. The most important element of the programme is the reduction of budget deficit from 6.4 per cent of GDP in 1999-2000 to 5.2 per cent in the current year. The lowering of budget deficit by such a wide margin in a single year is to be achieved through increased tax collections and strict expenditure controls. The press release makes it clear that Pakistan authorities should stand ready to take additional measures if revenues fall short of expectations.

The IMF is also very emphatic about external sector sustainability. According to the press release, a key element of the programme is the maintenance of a competitive and flexible exchange rate that is determined by market forces. Gross official reserves have been targeted at $1.74 billion at end June, 2001, equivalent to 7.3 weeks of import of goods and non-factor services. The increase in reserves would be achieved through an active exchange rate policy, monetary tightening, fiscal adjustment and exceptional financing. Improvement in balance of payments would be brought about by increased exports and sharply reduced capital outflows from a rebound in investor confidence. Monetary policy would be monitored very closely and net domestic assets of the State Bank, which determine primarily the rate of expansion of liquidity in the economy, would as usual be another important performance criterion. GDP is projected to grow by 4.5 per cent during 2000-2001 compared to 4.8 per cent last year. It must be mentioned that all the important variables in an economy are more or less inter-connected and interdependent. Set-back in a particular area usually has a rippling effect everywhere.

Apart from devaluation, the IMF has demanded broadening the tax base, strengthening tax administration, reforming the civil service, steps to integrate financial markets, improve position of public enterprises and banks, liberalise international trade, accelerate privatization, enhanced governance, substantial improvements in the collection and quality of data and transparency.

The IMF Board of Directors have, at the same time, dangled a carrot in front of Pakistan saying that if Pakistan carried out the conditionalities honestly and faithfully, it could lead eventually to the medium-term support from the Fund under the Poverty Reduction and Growth Facility (PRGF). The PRGF is currently the preferred name for IMF's typical programme for developing countries, broadly similar to previous acronym nightmares such as Enhanced Structural Advancement Facility (ESAF) and its ilk.

Finance Minister Shaukat Aziz at a Press conference in Islamabad on Thursday, said that this is clearly a major milestone in the efforts of the present Government to rebuilt the economy. The IMF support is a significant breakthrough, for which economic performance was the main determinant.

Ordinarily, there should be no cause to rejoice the foreign debt's approval, yet Shaukat Aziz's hard work to convince the IMF about legitimacy of Pakistan's compulsive need for a bail out package to overcome its cash starvation deserves appreciation. It is true that Pakistan is forced to seek IMF's assistance due to the serious financial constraints resulting from the previous government's heavy borrowing in the past, which had eroded country's ability to sustain its economy amidst the consequently mounting fiscal obligations.

Pakistan had to abide by the unprecedented conditionalities of the IMF and the World Bank and compromise on its vital national interests to seek financial support for its sagging economy. Let it, however, be understood by the country's financial managers that to sustain the economy with the help of foreign debts is no solution to the nation's economic ills. It will rather drift the country deeper and deeper into the IMF-World Bank duo's marshy financial solutions to deprive its political sovereignty, stand on its own feet economically. Like previous regimes, the present Government seems to have also resorted to the easy course of lending money for economic sustenance, rather than boosting the productive sectors for autarky. Pakistan has to pursue this course vigorously and shun the tendency of dependence on foreign debts for survival. It's time to get rid of the begging bowl as the mounting foreign debts are gradually incapacitating the nation to survive with honour, dignity and self-respect.