Doubts about the IMF programme

There were indications after the last review meeting held in Dubai in May, 2011 that an IMF mission would visit Pakistan sometime in July to hold discussions for the fifth review under the Stand-By Arrangement (SBA) with a view to reviving the $11.3 billion programme, presently stalled due to breach of certain conditionalities by Pakistan.
Despite this clear understanding, no dates have so far been fixed for the arrival of the IMF team, with the result that doubts are now openly being expressed about the possibility of meeting the agreed deadline and continuity of the programme. According to a report in this newspaper, it was totally up to the government to invite the Fund mission for negotiations but Pakistan has not sent a formal request as yet in this regard. There was, however, a possibility to extend the invitation to start discussions before the start of Ramazan. Some other sources have revealed that the IMF programme is now no more an economic but a political issue and the United States seems to be in no mood to help the country in the revival of the package until and unless Pakistani authorities strong willingness to remove Washington's apprehensions formed in the aftermath of OBL's killing in Abbottabad.
There are several factors, which strengthen such a perception. For instance, Pakistan and the IMF had agreed on certain fiscal and economic measures in Dubai and were also committed to having a full review of Pakistan's macroeconomic situation in July that was expected to lead to a resumption of the Fund's programme, suspended since May last year. There was apparently no reason not to honour this commitment because the country has achieved the tax target of Rs 1,588 billion, as well as successfully curtailed its fiscal deficit to 5.3 percent of the GDP, which was in line with the IMF condition agreed in the Dubai review.
As far as the issue of RGST was concerned, although Pakistan could not implement the measure in its true spirit in the new budget, yet sufficient sales tax exemptions were withdrawn with a view to easing the concerns of the IMF. In order to clear the growing confusion, the IMF officially confirmed on 19th July that the dates for the mission's visit to Pakistan have yet to be finalised. In other words, there was no plan for negotiations in July, 2011. The Secretary Finance had said that the government was not ready for negotiations because the budgetary numbers for the last fiscal year were not yet final.
Although nothing could be said with any degree of certainty about the status of the dialogue or the nature of our future relationship with the IMF at this point in time, the mere thought that there was reluctance or possibility of refusal to enter into serious negotiations to resume the existing SBA should be enough to sound the alarm for policymakers. Also, it says a lot about the capacity of developed countries, particularly the US, to twist the arms of developing countries and force them to fall in line in order to get assistance from the multilateral financial institutions. It is true that the amount of the remaining instalments suspended by the IMF is only $3.2 billion and Pakistan can easily afford to forego this amount at this stage because of a comfortable foreign exchange reserves position, but such a development could send highly negative signals to the international community about our commitment to the reform agenda agreed with the Fund. Sensing such a non-serious attitude on our part about the reform process, foreign investors and bilateral donors who are already jittery would try to avoid the country altogether. At the same time, other multilateral institutions could refuse to lend to Pakistan until the IMF issues a letter of comfort about the country's economy. Unfortunately, however, we are not living in a perfect world and the American connection to the IMF is here to stay. On the other hand, the improved current account position seems to have given a breather and provided some space to the policymakers of the country to make economic policy decisions with a certain degree of confidence and without undue haste. As per the latest data, Pakistan experienced a current account surplus of dollar 542 million during FY11 due to a record level of home remittances and exports in sharp contrast to a huge deficit of dollar 3.95 billion in the previous year with the result that foreign exchange reserves of the country are now hovering around dollar 18 billion.
Since there is still a question mark on the sustainability of this improvement, Pakistan could again revert to the old position of the C/A deficit and low level of foreign exchange reserves in a relatively short period of time. The timing of the Governor State Bank's resignation was also unfortunate. It reflects poorly on the management of the economy and has added to the perception that the government is only interested in patchy implementation of fiscal reforms and not serious in listening to the advice of the State Bank for broadening the tax base, eliminating untargeted subsidies and improving debt management. The irony is that while the level of foreign exchange reserves could provide a substantial cushion to near-term financial shocks, it could also lead the government into a state of complacency about its conduct of economic policy and create a blind spot about the underlying risks to macroeconomic stability.
The true test of the government, therefore, will be its ability to take a long-term view of the economy and decide accordingly. In our view, such a course will be greatly facilitated if the country goes an extra mile to engage the IMF and removes any doubts about the continuity of the present relationship. Seen closely, most of the measures and targets proposed by the IMF make ample sense and are in our own long-term economic interests. Nobody is suggesting that we should be subservient to the Fund, but there is no harm in accepting its advice and resources when the economy is in a poor shape and there is no escape from following the same policy prescription. Economic decision-making should not be held hostage to political expediency, particularly at a time when the stakes are too high. Principles are intended especially to guide our behaviour in difficult circumstances. If we don't do so, then our commitments stand revealed as having been nothing but rhetoric in the worst sense of the word.