IMF's Letter of Comfort

A Business Recorder exclusive has revealed that multilateral institutions including the World Bank, Islamic Development Bank and the Asian Development Bank have requested the government of Pakistan to provide a Letter of Comfort (LoC) to be issued by the International Monetary Fund (IMF) as a precondition for the release of any committed assistance for budgetary support.
This should surprise no one. In 2008, the newly-elected government focused its efforts on generating resources from bilateral and multilateral sources by taking advantage of what was termed as the 'democracy dividend'. However, it was compelled to realise that governance issues were a major impediment to the disbursement of the pledged assistance and until and unless the IMF gave a green signal to the prospective donors/lenders, there would be no releases. The options at the time, analysts are agreed, were limited and Pakistan went on the IMF programme that envisaged budgetary support of 11.3 billion dollars.
Pakistan is currently on the IMF Stand-By Arrangement (SBA) that is stalled leading to the suspension of the last two remaining tranche releases (estimated at around 3.2 billion dollars). The government of Pakistan has been informed in no uncertain terms by the IMF team that it must fulfil its part of the bargain that was sealed in the government's first Letter of Intent (LoI) signed on 20 November 2008 and reinforced in all subsequent LoIs and submitted to the IMF Board for approval as a precondition to loan and/or tranche approval. Suspension of the SBA automatically implies that the IMF is not satisfied with the government's reform programme and has decided to give some grace period in the expectation that the government would comply with all the conditions it had agreed to in its LoIs.
Pakistan not only suffers from short-term problems, such as the recent floods but has chronic problems as well, such as the abysmal tax-to-GDP ratio. There is general agreement that the summer floods last year seriously compromised the government's ability to meet its targets as specified by the IMF under the SBA. However, the demand for a LoC by multilaterals as well as bilaterals reflects an obvious fact: the continuing concern of the donors - be they multilateral or bilateral - that the macroeconomic management of the country is not at par with the commitments made. It is relevant to note that this would not impact on the pledged assistance for development projects, only on budgetary support and therefore to argue that the Friends of Democratic Pakistan (FoDP) are no longer interested in the development of the poor and the vulnerable would not be accurate.
The FoDP have expressed serious reservations about the way our macro-economy is being handled and a quick look at the economic decisions taken by the government reveal that their concerns must be appropriately dealt with in the interests of the people of this country.
Two major policy decisions that have undermined the government's ability to meet the targets as agreed under the SBA are (i) insistence on slashing development expenditure, unlike the donors who have held only programme lending or lending for budgetary support hostage to the government's continued profligacy, and its corollary (ii) the profligacy of our government is a subject of donor censure, given the economies that are currently being effected to combat recession throughout the world that include freezing the wages of bureaucrats as well as the expenditure of government ministers and parliamentarians. To meet its expenses, the government is resorting to the most denigrated policy in economic theory of all times: borrowing from the central bank, which at last count, was printing currency notes worth over 2 billion rupees per day to fund excess expenditures.
The government's strategy to deal with the situation lacks any long-term vision, and is premised on the United States, a key player in the war on terror being fought in the north of Pakistan, to use its influence with the IMF and other bilaterals to release the stalled pledges. Meanwhile multi-billion rupee corruption scandals continue to be unearthed and the federal law enforcement agencies are seen to be supporting the accused, as opposed to conducting an unbiased investigation.
These scandals necessitate bailout packages, another drain on the exchequer. Inefficiency at best, outright corruption at worst, in most state-run utilities remains a major impediment to not only raising tax collections by the Federal Board of Revenue but also wastage as in the case of high power transmission losses. This is simply untenable and one would hope that the Federal Finance Minister turns his focus on making a difference rather than being a bystander in the status quo.