The International Monetary Fund (IMF) mission arrived in Pakistan on 7 November and is still in the country with scheduled departure on 22 November. The objective of the mission: to discuss the modalities (pre-programme conditions as well as during programme conditionalities) and in the event that a staff level agreement is reached it would be announced in a joint press conference between the mission leader and the Finance Minister Asad Umar as per past precedence.
Gerry Rice Director Communications Department International Monetary Fund (IMF) stated at IMF headquarters in Washington DC on 1 November 2018: "On October 11, during our Annual Meetings in Indonesia, Pakistan's Finance Minister made a formal request for financial assistance from the IMF. And, of course, the objectives of that program to help stabilize the Pakistan economy, put in place the preconditions for sustained inclusive growth, and modalities of that would be announced once we've reached a staff level agreement. And then the usual process, once the staff level agreement is reached, then we'll go forward to our Board for the formal approval of the program. There will be, again as usual...a press release, there will be a communication at the end of that. Assuming staff level agreement is reached, there would be a communication at that point". This statement leads to an obvious conclusion: that the exact amount of the bail-out package would not determine the conditions that the Fund would insist on; sadly this was not the case with Prime Minister Imran Khan and Finance Minister Asad Umar, who consistently maintain that as the country's immediate external financing requirements have been met by pledges made by friendly countries therefore the funding request from the Fund would be minimal and hence the associated conditions would not be as harsh. The two men must have realised by now that the amount of the bailout package is not relevant to the conditions that the Fund may insist on which start off with policies designed towards achieving stabilisation (defined as strengthening the reserve position and reducing the current account deficit to sustainable levels) to be followed by policies designed to achieve sustained inclusive growth.
The current visit of the IMF is the second time since the Pakistan Tehreek-e-Insaf government assumed power. The first mission dates were from 27 September to 4 October and the objective, as per IMF website, was to "discuss Pakistan's economic situation and exchange views on necessary policies for economic stabilization and sustainable inclusive growth." Harald Finger, the mission leader, made a statement uploaded on the IMF website that can be split into two parts. First the pat on the back: "the team welcomes the policy measures implemented since last December. These include 18 percent cumulative depreciation of the rupee, interest rate increases of cumulatively 275 bps, fiscal consolidation through the budget supplement proposed by the minister of finance, a large increase in gas tariffs closer to cost recovery levels, and the proposed increase in electricity tariffs. These measures are necessary steps that go in the right direction." These measures were proposed by the IMF mission in December last year and implemented up to a degree by the previous administration (though with the elections scheduled for 28 July political considerations outweighed economic considerations) as well as by the incumbent government.
And then the IMF's sharp slap on the wrist, "additional decisive policy action, anchored in a comprehensive strategy, and significant external financing will be needed in the near term. Policies should include more exchange rate flexibility and monetary policy tightening, further fiscal adjustment anchored in a medium-term consolidation strategy, and strengthening the performance of key public enterprises together with further increases in gas and power tariffs. Together, these steps would help reduce current account pressures and improve debt sustainability. Importantly, to protect the more vulnerable segments of society, there is a need to further strengthen social protection through the Benazir Income Support Program. These policies will help stabilize the economy and lay the foundations for sustainable and inclusive growth."
The mission further added that "once stabilization is beginning to take hold, the focus should increasingly shift to reforms to foster sustained and inclusive growth and strengthen key institutions. Priority areas include modernizing the tax system and public financial management, strengthening fiscal federalism arrangements, improving governance and eliminating losses of public enterprises, enhancing the SBP's autonomy, intensifying AML/CFT efforts, improving the business climate and anti-corruption efforts, and fostering the economic inclusion of the poor, youth, and women."
Five likely conditions for a bailout package can be gleaned from the press release dated 1 November: (i) a further increase in electricity and gas tariffs. The government may claim, like its predecessor, that the need to raise rates to achieve full cost recovery will decline as theft, distribution and line losses are dealt with and sector governance improves but the IMF has heard this refrain before and may add the clause that in the event that governance does not improve the rates would rise; (ii) depreciation would continue till the currency's market value is achieved however this is unlikely to be more than 140 rupees to the dollar given that the rupee has depreciated in value considerably since December; (iii) increasing revenue. While Asad Umer's claim that revenue would rise by 92 billion rupees through greater use of 'technical' factors (a claim made in the supplementary budget) may not be overtly challenged yet the Fund would add the clause that in the event that this does not happen, taxes would be raised and, given the focus on stabilization, taxes raised would be on existing tax payers, the easiest to collect, rather than on widening the tax net. Umer would be well advised to take precautionary measures to ensure that the projected revenue from the recent raise in regulatory duties on non-essential imports must include better policing across our huge porous borders; and the Fund is also likely to insist on a major privatization programme rather than the small 35 entities targeted for privatization according to the Privatization Commission's website; (iv) expenditure would have to be curtailed and the practice so far has been to slash development expenditure with a consequent negative impact on growth, a practice that apparently continued in Umer's supplementary budget. A more appropriate policy would be to curtail two major items of current expenditure - allocation on civil administration increased by close to 100 percent during the past five years (from 215 billion rupees in 2011-12 to 402 billion rupees in 2017-18) and military outlay rose from 510 billion rupees in 2011-12 to 999 billion rupees in 2017-18). While the operation against terrorism was critical to provide security to the people, any government's primary responsibility, yet terrorism has been brought under control by now. Given that the state of the economy merits sacrifices from all sectors and all people one would hope that a freeze on allocations for the next two to three years is agreed with the civil and military establishment; and (v) end the reliance on borrowing from the State Bank of Pakistan, and raise rates (which is likely to be supported). During the current fiscal year the government has already borrowed over 2 trillion rupees from the SBP and the IMF would insist this be stopped immediately.
Once stabilisation is achieved, the IMF would then focus on growth policies. However, in this context, it is relevant to note that Pakistani governments get complacent once stabilization is achieved and have not followed through with structural reforms particularly in the tax and power sectors. Umer is on record as having stated that he supports withholding taxes but he needs to understand that the bulk of these taxes are in the sales tax mode (on services and products) and not in the income tax mode which implies that the filers (though charged less than the non-filers) are paying a tax on their income and then again when procuring the service/item that is taxed. One would hope that this time around the tax structure is reformed. Likewise the power sector's governance has been appalling and this in spite of the previous government's attempt to eliminate the circular debt, reduce theft and distribution and transmission losses. In short the challenge to reforms would be considerable and the Khan administration must not assume it will succeed where others failed.
Finally, the Khan administration is focused on a social sector programme which has two major flaws. First, social subjects were devolved to the provinces and hence the centre has a limited role to play in this regard. The federal government must stop financing these ministries and instead dissolve them thereby compelling the provinces to enhance capacity as per the requirements of the National Finance Commission award. And secondly, there is a need to amalgamate poverty alleviating programmes, including house building for the poor, into the Benazir Income Support programme (BISP) which has identified the vulnerable and which is supported by multilaterals. Let not Imran Khan display the same reticence as the PML-N administration in making this a national flagship project because of its name.
To conclude, much would have to be agreed with the Fund which is against the manifesto promises of the incumbent government. And irrespective of the Saudi or Chinese or any other package to reestablish our bona fides in the international community as a prelude to fuel exports (our friendly countries sadly account for very little of our annual export earnings) the IMF package is a necessity.
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