When the Government of Pakistan (GoP) entered into an agreement with the International Monetary Fund (IMF) for a bailout program one of the biggest apprehension was that the conditions imposed by the Fund may plunge the country deeper into problems. After the conclusion of recently held review the Fund has asked the GoP to definitely achieve the revenue target, keep a cap on issuing new guarantees and put into effective implementation of circular debt reduction strategy.
The IMF advice can be summed up as, ‘address longstanding issues by undertaking structural reforms and strengthening institutions through legal framework to make the country competitive’. This requires strengthening cooperation at the federal and provincial levels for greater fiscal and economic discipline. While some analysts may term it ‘Do More’ mantra, the overwhelming consensus of analysts is whether the Fund insists or not, Pakistan has to take corrective measures to usher sustainable GDP growth to overcome its woes.
Reportedly the mission has appreciated policy stance of State Bank of Pakistan and wanted its continuation in the short- to medium-term period. The Fund wants the government to play a more proactive role in ensuring independence of the central bank through legal instruments. The Fund has also called the GoP to avoid any tax exemptions and take decisive steps towards ‘harmonization of taxes and removal of distortions’ at federal and provincial levels.
The Fund also wants further progress on implementation of Public Finance Management Law and noted that there were still public funds outside the single treasury account, which should be phased out at the earliest. This will further add to the fiscal cushion as all public funds would remain in single account, providing greater maneuverability to the government.
The IMF has insisted on strict adherence to Rs1.6 trillion worth of government guarantee limit and discussed various options with the Ministries of Finance and Power regarding tariff issues. The fine print of these options would be part of the staff report and may be made public as part of concluding statements.
The mission also reportedly insisted not to lose sight of the fiscal discipline that had delivered dividends in the first quarter of this year as fiscal deficit came down to 0.7% of GDP as compared to 1.4% for the same quarter last year. Some ideas were also discussed on readjustment of regulatory duties on various import items. There will be some increases in duties on non-essential imports and reduction on those relating to raw materials and industrial requirement in priority areas.
The authorities are expecting disbursement of second tranche of about $453 million in December this year as a result of completion of the first quarterly review. Pakistan had already received about $995 million in July out of total $6 billion program on completion of all prior actions committed by the country before signing the fund program.
Under the program, the GoP is required to deliver on six performance criteria including those relating to net international reserves, net assets of the central bank, SBP’s stock of net foreign currency swaps and forward position, primary budget deficit, no government borrowing from central bank and a ban on government guarantees.
In addition, there are two continuous performance criteria including zero new credit to the government by SBP and on accumulation of external public payment arrears. On top of that, the authorities’ performance is also reviewed on five indicative targets including disbursements under Benazir Income Support Program, government spending on health and education, tax collections, payment of tax refunds and a freeze on power sector’s circular debt.
Let us review what IMF has to say. Jihad Azour, IMF’s Middle East and Central Asia Region Director said the reform agenda currently in place in Pakistan, supported by the IMF program, was the right recipe for the country to improve macroeconomic stability, address some of the imbalances that the country saw in the past few years, allow the economy to be more competitive, and improve its creditworthiness. He also suggested to Pakistan to address some of the legacies of the past, particularly in the energy sector and strengthen institutions providing the right legal framework for the central bank for the power sector as well as other entities. He was also of the review that the progress that has been achieved goes in the right direction, but it was too early to give a full assessment. The Fund can come up with a better opinion after due diligence.
This is the 23rd program Pakistan has signed with the lender of last resort, but do more mantra or insistence on undertaking new structural reforms is a bitter pill to swallow. Two questions come to mind immediately: 1) was IMF more than generous in condoning Pakistan’s not meeting the desired target? 2) Was lending to Pakistan linked to its role in cold war era and then to its role in Afghanistan? On the face value the two questions seem so badly intermingled that it may not be wrong to say that IMF programs were aimed at supporting Pakistan because its economy was a victim of ‘terrorism’, despite the fact it was ‘frontline partner of United States in war against terrorism’.