With the green signal given by the incoming PDM 2.0 to the Ministry of Finance to initiate ground work for another (International Monetary Fund) IMF programme, IMF’s willingness to work with the new government and US coaxing Pakistan to undertake structural reforms, the country is all set to embark on its 24th experiment with the IMF.
Nationally, the economic gurus and experts may be preparing their own version of IMF programme.
Hopefully, in the months ahead, the MoF (ministry of finance) and the ‘home grown’ IMF programme documents will morph into a single document to be negotiated with the IMF.
Designing a solid home-grown document that portrays disciplined fiscal and monetary self-restraint, contains realistic inter-temporal fiscal, monetary policy numbers and growth targets, will be a challenge and novel for GOP. So far it is familiar with presenting an offer list of assets to sovereign and private foreign investors to attract more USD.
Not undermining the above national challenge, the purpose of this article is to peep at the other side of the fence and stylize what kind of dilemma the IMF faces once Pakistan approaches it for the 24th time.
Let’s begin with the trust environment facing the lender to support the expected programme. Unfortunately, IMF’s trust of elected politicians, specifically since 2008 eroded gradually and is now less than of caretaker governments’ ownership to carry out ‘structural reforms’ simply because of lack of political will, frequent use of waivers and geo-political, geo-strategic, geo-economic and geo-climatic trump cards and last minute implementation of a prior conditions.
Fortunately, this time around, except for the geo-climate ‘trump card’ all the others cards have lost their shine. Moreover, the performance of the latest caretaker government has shown that the risk of ‘death trap’ is enough to enforce short-term non-political will at least for the ‘stabilization’ reforms.
The feelers thrown from the incoming PDM 2.0, if translated into actual reforms, will be a litmus test for the political ownership of the new programme.
A crucial dilemma for IMF is how a hung parliament or a coalition government hanging by a thread will be able to undertake painful ‘structural’ reforms that require political, legal, inter-provincial and administrative buy-in. Even IMF has observed, “Adjustment episodes launched in countries where governments enjoy a parliamentary majority and do not face imminent elections, are found to be more successful.”
During the last 23 programmes, IMF dealt with various types of governments in Pakistan, including hybrid, single political party in power, political coalitions, caretakers and interim setup. However from 2024 onwards IMF will witness a unique political setup, where the executive and legislative powers are distributed party-wise in the coalition.
Thus reforms requiring legislative consensus or time-bound implementation momentum at the national and provincial level can be killed, held in abeyance or implemented with weak political will fueled by different ideological positions or public narratives of the partners. However, there is a silver lining in the cloud.
The economic challenges facing the nation and their stylistic solutions may have been discussed threadbare at the 6-day coalition formation stage with implicit understanding to take common position on the economic challenges confronting the nation.
In absence of such an understanding and given the controversial election results of 2024, the economic stability and re-start of consensus-driven reform process that IMF considers essential for political ownership will be elusive.
While the wish list of GOP programme’s version may contain back loaded conditionalities, it is a foregone conclusion that it will be a front-loaded programme, with apriori actions. Emboldened by IMF’s largess to Egypt, in a similar economic crisis, the GOP programme wish list may also request a larger lending size with a longer timeline to implement so called tough re-packaged reforms left untouched since last 30 years.
Though it may take longer than before to negotiate a larger size lending programme, for GOP this would be a bonanza as it indicates a revival of IMF’s trust and open the gateway for more debt accumulation from friendly countries to continue in its old ways.
Given the past 30-year experience with Pakistan, IMF is also faced with the following additional set of dilemmas. Should it increase the size of the lending programme and the timeline of its implementation? Given the larger size, should it also add a list of new deeper and tougher organisational reforms along with the list of backlogs.
Another combination could be an increase in lending size, re-package leftover reforms but no extension beyond 3 years.
Yet another option could be no increase in size beyond USD 3-5 billion and no increase in conventional 3-year timeline just to implement the backlogs. A more strict option is to have a series of one-year renewable SBAs for stabilization plus implementation of one or two deep ‘structural’ reforms per each SBA.
From the prospective of IMF, each of the above dilemmas is not without implications at the negotiating table. If the IMF goes for a 5-year programme with a larger size, disruption cannot be ruled out due to a climate and supply-side shocks and the resultant list of waivers.
Political costs may also be high if GOP is confronted with a new list of deeper reforms in addition to the left-overs. It may end up even with fewer ‘structural’ reforms from the new enlarged list than the list of left-overs. With a 3-year programme, although attractive for the political party in power as it can go on a spending spree in the remaining two years of its life without the oversight of IMF.
However, it should then expect a request for the 25th programme from the new government. The unique political set-up and uncertainties surrounding it, two one-year SBAs give an opportunity to IMF to test the political ownership of the coalition government, thereby narrowing the trust deficit, test the performance and caliber of the new economic team by adhering to strict and short timelines, keep an eye on stabilization targets, less leeway on a borrowing spree from the friendly countries and give an opportunity to home grown gurus and economic experts to undertake real ‘structural’ reforms.
After two years, IMF with better understanding of the political and economic dynamics/landscape can further fine-tune the stabilization component and enter into a 3-year deep-rooted ‘structural’ programme.
The above attempt at stylized analysis offers a glimpse of what can be opened at the negotiating table between the IMF and GOP and an opportunity to align internally designed IMF programme with the presumed thinking of the IMF.
Copyright Business Recorder, 2024
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