IMF comes a-calling again

According to newspaper reports the International Monetary Fund (IMF) accepted the government's offer for talks. This implies that the Fund did not initiate dialogue under the terms and conditions of the Technical Memorandum of Understanding signed by the government and the Fund on the stalled Stand-By Arrangement (SBA) that required quarterly programme reviews and quarterly performance criteria.
The Fund procedure is simple: if the debtor government succeeds in convincing the Fund staff that it complied with all the agreed conditions to the extent possible and that external/internal factors, over which it had little or no control, compromised its ability to comply with some other conditions which, the government commits to comply within a stipulated timeframe then and only then, would the Fund release the subsequent tranche under the SBA. The Fund staff is, therefore, highly unlikely to initiate dialogue if the macroeconomic indicator particularly the budget deficit, remains a source of serious concern.
A look at Pakistan's budget deficit forecast reveals the extent of the IMF concerns with respect to the government's record on compliance with agreed conditions. The deficit, if the current status quo in terms of policy decisions remains, is expected to be around 8.3 percent according to informed sources in the Finance Ministry - one percent higher than what the PPP government inherited in 2008 and committed to bringing down to sustainable levels within a two-year period on November 20, 2008 as per the Letter of Intent it submitted to the IMF.
This forecast is premised on a number of factors. First, the failure to implement the value-added tax or the renamed revised general sales tax, targeted to bring the small retail sector into the tax net through documentation (a failure resulting from opposition by the chambers of commerce and industry represented by a large number of retailers/wholesalers). This tax is also being opposed by all political parties with a large support base in the undocumented productive sector of the economy.
Secondly, public as well as political resistance to an increase in the domestic price of oil and its products, reflecting a rise in the international price of oil as the Libyan crisis continues. In other words, political parties notably the MQM, have already expressed non-support for the recent rise in oil prices by a little under 10 percent. If the government succumbs to this demand for political reasons then the deficit would rise by more than that forecast, as subsidies rise dramatically.
Thirdly, power sector reforms continue to be compromised and the government has shown an inability to ensure full-cost recovery that would have strengthened the capacity of the sector to reduce the inter-circular debt, as well as reduce the hours of load-shedding. Support for rental power plants, when the third party audit clearly expressed serious reservations on the award of tenders and indeed on the very need to support RPPs in terms of the country's generational needs has led to accusations of poor governance at best, outright corruption at worst.
While the government is taking the allegations of corruption very seriously, however, instead of ensuring accountability within its investigative branch it has, according to reports, focused its angst on Amnesty International Pakistan for lowering the country's performance on the corruption perception index in a global context. Thus the multi-million dollar financial scams implicating influential families have become almost routine, a fact that must be routinely perused by the IMF staff dealing with the SBA.
With bilaterals and other multilaterals refusing to extend budgetary support until and unless the government provides the elusive Letter of Comfort from the IMF, printing money has become the favoured mode for meeting the burgeoning budget deficit, an economically disastrous policy. The government is at pains to justify the current state of the economy, worse than what it inherited, by laying the blame for not supporting its two pending money bills in the parliament, on the opposition as well as the coalition partners.
The latter, in turn, blame the government for not reducing leakages from the system, through continuing to appoint heads of state-owned entities based on nepotism. The government also points out to the summer floods and global recession as factors that have impeded compliance with IMF conditions. These are legitimate factors, but the IMF team may well argue that these two factors, over which the government had no control, were taken into account when the previous tranche was released.
In short, the existing impasse is premised on the trust deficit that afflicts the government's relations with its coalition partners as well as the opposition, is so necessary to restore macroeconomic stability and support structural reforms. This charge is serious and it is unlikely that the government would be able to convince the visiting IMF team to grant it a further extension with respect to compliance, while agreeing to disburse the tranche.