On March 25, 2016 the Executive Board of the International Monetary Fund (IMF) completed the tenth review of Pakistan's economic performance under the three-year Extended Fund Facility (EFF) amounting to SDR 4.393 billion (about US $6.64 billion) or 216 percent of Pakistan's current quota at the Fund and immediately disbursed an amount equivalent to SDR 360 million (about US $502.6 million), bringing total disbursements to SDR 3.96 billion (US $5.53 billion).
Following the Executive Board's review, Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair issued a statement couched in a language which when shorn of its dense phraseology makes one wonder whether Furusawa was expressing his satisfaction over the performance or pointing out serious slippages. Interestingly, in completing the review, the Executive Board 'approved' the authorities' request for 'modification' of the end-March 2016 performance criterion' on the State Bank of Pakistan's stock of net foreign currency swaps/forward position. The Board also advised that further progress, including in the area of structural reforms, was needed to generate strong and inclusive growth and make the economy more resilient and competitive.
The Board also found that further widening the tax net and ensuring the fairness of the tax system, together with prudent management of budgetary spending and close co-ordination with the provinces, remain important to consolidate the 'gains' in addressing Pakistan's 'fiscal vulnerabilities' while generating the necessary resources for higher priority spending in areas such as infrastructure, health and education.
Further, the Board found that while falling oil prices have helped efforts to bolster foreign reserves addressing remaining recommendations of the 2013 Safeguards Assessment would be the key to strengthen it further. Also, reinforcing financial sector resilience, according to the Board, remained 'pertinent'. While terming the 'recent amendments to the AML Act as a first step to widen the application of anti-money laundering tools to the proceeds of tax crimes the Board advised that further efforts to strengthen the AML/CFT framework would help strengthen financial stability and tax compliance.
And noting the 'recent setbacks to the agenda to restructure or privatise loss-making public sector enterprises' the Board has desired continued 'resolve to complete the planned reforms' terming them important to address fiscal risks and strengthen economic efficiency. The Board also welcomed authorities' focus on 'containing losses in affected companies'. According to the Board, further improving the business climate, transparency, and governance should help generate high and more inclusive growth.
Since the instalment amount due following the tenth review was disbursed by the Fund without any loss of time or haggling one is obliged to believe that the Board had conducted the review rather too sympathetically ignoring the slippages but recording its dissatisfaction over some of the pertinent failures in a round-about language so as to save itself from being questioned on what seems to be a 'quick-fix' review.
The central bank continues to remain far from being really autonomous of the Finance Ministry. The tax base continues to remain highly limited. Privatisation process has not yet taken off though the 33-month long programme is almost nearing its end. The growth continues to be more exclusive than inclusive and physical as well as social sectors like education and health continue to receive paltry budgetary allocations as fiscal vulnerabilities continue to retard resource mobilisation efforts with reforms for improving the business climate, transparency and governance continue to remain unimplemented.
Not that one had expected all these aspects to have improved following the implementation of the Fund's age-old macroeconomic stability formula through the EFF programme. Pakistan is both a heavily import-dependent country and one with a heavy debt burden. But its ability to finance the two without burdening the country with more debt is abysmally weak. To cover at least three weeks' import bill and escape certain default, it has to continuously seek to maintain a respectable amount totalling about $20-25 billion in its foreign exchange reserves, mostly through borrowing, as its own income from its exports has been far from being adequate to cover even annual amortisation of past loans.
In its earlier report under the ninth review of Pakistan's economy, the IMF raised concerns about further loss of Pakistan's export competitiveness, stating that exports and consequently growth would be adversely affected further if "Pakistan falls behind competitors in securing favourable treatment in major markets".
According to this IMF report, exports declined in the first quarter owing to falling cotton prices and real exchange rate appreciation. In the Fund's estimation, Pakistan's export competitiveness also suffered from structural factors, such as security concerns, power outages and an unfavourable business climate, as well as from significant real exchange rate appreciation over the past two years.
Since the IMF operations are controlled by its largest shareholders - the US and Europe - more often than not, the Fund's policies get influenced by the global policies of these large shareholders, and especially that of the US. Most probably, the US and its allies do not want a nuclear-armed country to collapse nor perhaps do they want to lose their control over it. So perhaps, they have asked the Fund to keep the country afloat with bailouts and not to help it out of its continued stagnation. Therefore, the Fund obliges, no matter how many times we fail to fulfil the conditionalities set by it.
Indeed, despite the poor record of implementing IMF 'reforms' by Islamabad, the Fund has continued to come to our rescue every time we went to Washington, seeking an immediate bailout. The Fund, ostensibly in order to ensure that it would get back its loan, imposes a lot of austerity conditions on the borrower assuring it at the same time that in the long run its economy would start growing at an accelerated rate."In the long run we are all dead," so said John Maynard Keynes. So, the austerity formula has proved, in the long run, to be a stagnation trap for countries that went to the Fund seeking an emergency loan.
Macroeconomic stability is a highly desirable goal but by the time a country succeeds in achieving this goal, it invariably ends up with even more chronic resource constraints with the unemployment rate shooting through the ceiling and inflation spiralling out of control. Therefore, instead of seeking ways to return to the Fund after the current program expires in September, we should be doing some creative thinking on this matter. For example, we could approach the new infrastructure bank that China has floated and offer India and Afghanistan transit trade facility on an attractive rental in return for a political or economic quid pro quo from New Delhi. And what would that be? Our strategic thinkers should have by now 'war-gamed' the idea to find out how much would the Indians pay in political and/or economic terms for 'buying' the transit route. We should start the negotiation seeking more than what they could afford and settle for what they can really live with.
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