EDITORIAL: The International Monetary Fund (IMF) has been extremely rigid in backing off from its extremely harsh upfront conditions agreed under the ongoing Extended Fund Facility programme effective 1 July 2019 with prior conditions agreed with staff on 12 May 2019.
From Pakistan’s side three finance ministers have negotiated on behalf of the people of Pakistan – two during the Khan administration notably Dr Hafeez Sheikh and Shaukat Tarin and one during the coalition government, namely Dr Miftah Ismail, with Ishaq Dar as the incumbent finance minister poised to negotiate on the looming ninth review.
Apart from Dr Hafeez Sheikh, who agreed to the harsh upfront conditions that reflected a complete lack of empathy with the people of this country his successors tried to renegotiate the package in an attempt to phase out the harsh conditions but failed.
Shaukat Tarin basing his optimism on his previous success in negotiating with the Fund (2008) merely delayed the sixth staff-level agreement, a prerequisite to the tranche release till end January 2022.
And Miftah Ismail too tried and not only failed but had to agree to conditions on behalf of Pakistan that were even more stringent than those agreed under the sixth review because the economy had become even more fragile due to the relief package announced by the previous government on 28 February 2022.
True, Ismail never played the trump card, notably the devastation caused by the floods, in the seventh/eighth reviews, a fact that may give some leverage to his successor.
Ishaq Dar too is displaying a level of confidence in his ability to convince the Fund staff to defer/delay some of the harsh conditions – a confidence based on his previous success with the Fund staff; additionally, he is the only finance minister of an elected government who actually completed a Fund programme unlike his three predecessors: Dr Hafeez Sheikh abandoned the programme that was negotiated by Shaukat Tarin who resigned mid-way through its completion and Miftah Ismail never negotiated a Fund package in his short stint heading the Finance Ministry in 2017-18.
While not challenging the capacity of Ishaq Dar to effectively negotiate with the Fund one would hope that he bears in mind three factors that are significantly different from his earlier stints as the finance minister.
First, the state of the economy today is much more fragile than ever before and the blame rests with flawed government policy decisions over the past two to three decades that account for: (i) a rising power sector circular debt which is over 2.5 trillion rupees today - reflective of poor performance of all subsectors including those negotiating contracts with the Independent Power Producers to high receivables to failure to check theft; (ii) a dependence on regressive taxes, high rate of sales tax and high rates of withholding tax in the sales tax mode, that has increased the burden on those least likely to bear it; (iii) overstaffing in state-owned entities and failure to appoint on merit which accounts for around a trillion rupee budgetary annual injection to keep them afloat; (iv) current expenditure rising as a component of the total budget while development expenditure is slashed to partially meet the budget deficit; and (v) heavy reliance on borrowing from external and domestic sources to meet the revenue shortfall.
In other words, while the floods have displaced 33 million people with at one time more than one-third of the country inundated, yet sustained structural imbalances have brought this country to a state of economic fragility that would require bold solutions that have been agreed with the Fund but only partially implemented.
Secondly, the Fund’s team in early 2020 proactively backed off from the harsh conditions due to the onset of Covid-19 globally, leading to a prompt release of 1.38 billion dollars under its rapid financing instrument mid-April 2020 (the first Covid case in Pakistan was noted end March 2020) and agreed to loosen the tight monetary and fiscal policies yet the new Fund team appears to ignore the devastation wrought by the floods even though its impact on the people of this country is being estimated at far higher than the Covid’s impact.
In other words, the Fund team has shown a dogged determination in resisting calls for phasing out the harsh upfront conditions to date and time will tell if Dar’s optimism, like his two predecessors’, is misplaced or not.
Dar has already taken two decisions that are at odds with what was agreed with the Fund under the seventh/eighth reviews notably not raising the petroleum levy for this fortnight and his statement to a private television channel that the rupee would be strengthened through government policies which has raised the spectre of intervention in the market – a policy that would be at odds with the agreement with the Fund to a market-based exchange rate.
And finally, what is different today from his earlier stint is the changing geopolitics in the region. The US, the country credited by previous finance ministers as playing a critical role in convincing the Fund to extend and/or renegotiate an existing programme, is insisting on Pakistan renegotiating on all China Pakistan Economic Corridor (CPEC) projects, estimated in excess of 50 billion dollars, which so far Pakistan is resisting. There appears to be no solution in sight to this issue that is in Pakistan’s interest.
While we support the finance minister’s objective to renegotiate with the Fund, however, we also sincerely hope that there is a ‘Plan B’ as well.
Unfortunately, however, neither ‘Plan A’ nor ‘Plan B’, if any, can be the right or adequate solution in view of the current state of economy, which is beleaguered by, among other things, the burden of flood havoc.
Copyright Business Recorder, 2022