The burning question discussed in the last EAC meeting was the IMF. The case of Egypt was showcased by the Finance Minster to not go to the IMF unconditionally. The majority of the EAC members firmly opined that the government should urgently accept the IMF programme without leaving a room for debate on the social cost of IMF conditions. More importantly, they are not putting Pak-US political relation in equation in determining and pursuing IMF conditions.
The IMF funding is required for bridging the external funding gap, and IMF programme is deemed fit for implementing tough structural reforms and to have Fund's borrowed credibility for attaining funding from other sources and to incentivize the FDI. (Read "A case for doing without the IMF", published on 26th October, 2018).
The funding gap has been met for this fiscal year; but there is no provisioning yet for next fiscal year. The government has bought time to negotiate with the IMF and it needs to work on creating alternate sources. The IMF programme can surely be further delayed for a few months.
The government already has a resolve towards tough adjustments and structural reforms - such as currency adjustment, interest rate increase and passing on of energy sector subsidies to the consumers. Yes, there are degrees of separation on the pace, extent and mode of reforms. The IMF wants currency to be undervalued while the government might be content with rupee dollar parity at fair value. (Read "Currency equilibrium -almost there", published on 4th February, 2019).
Some say that the IMF believes inflation in Pakistan is understated, as id did not move in tandem with currency depreciation, the way it did in Egypt. It is unfair comparison. Inflation in Pakistan is bound to remain low as food (34.8% weight in CPI) and house rent (21.8% weight in CPI) are largely insulated from currency adjustments. If anything, inflation in Pakistan is overstated. (Read "inflation to remain in single digit", "CPI-unfolding house rent index mystery" and "Impact of currency depreciation").
The tough adjustments which are yet to be fully passed on are energy prices - gas and electricity. The IMF’s viewpoint is right as the existing mechanism of subsidies simply cannot sustain. However, there is a social cost that PM Imran is not inclined to incur with or without IMF, at this point. The other problem is fiscal deficit which is not falling and for that, the IMF prescription would be to further tax the existing base, via GST or super tax – this comes at a social cost as well.
Thus, on energy and fiscal deficit - interlinked issues, the government has to do more. The government has a resolve to do so, albeit, at its own pace, by bringing governance in energy sector and by expanding the tax base by bringing untaxed into the net. On taxes, the focus is there and it may take time to see results. On energy, market deregulation and privatization are the way forward and the current view needs to change.
Another oft-mentioned point in favour of IMF programme is credibility in international market to fetch loans and FDI. All said, It is borrowed credibility and is not sustainable. Pakistan has been into numerous IMF programmes and the credibility never sustained. The so called structural reforms under IMF programme did not yield the desired results either, as boom bust cycles have become more frequent in Pakistan.
If appropriate discount to the so-called long term benefits from IMF conditions is applied, the social cost argument becomes paramount. According to the FM, poverty in Egypt increased from 30 percent to 53 percent under recent IMF programme while the currency adjustment did not help reduce current account deficit. The fact is that currency depreciation lowered the current account deficit in Egypt due to increase in tourism (receipts on travel) and home remittances, but not trade deficit. (Read "Learning from Egypt", published on 7th February 2018).
The final point for IMF programme is external stability to fetch loans and FDI. An earned credibility based on home grown reforms is always better than IMF's borrowed credibility. The government needs to build a strong domestic reform story to attract foreign investors and lenders. The foremost important point is to take a good 'U-turn' on reforming PSEs - mainly in energy sector.
The government can showcase its resolve on reforming taxation system by bringing the untaxed into the net, and it should portray Pakistan as a new tourist destination. The government needs to capitalize its efforts on social safety net by promoting health card and other similar initiatives. The government needs to sell its story on improving doing business climate, and the list goes on. These steps can help create genuine credibility.
The question is what to do with the IMF - capitalize on the time, the government has in hand. Six months ago, it was a desperate situation. Today, it is not. Pakistan needs to graduate from a typical IMF programme by negotiating on reforms at own pace without incurring high social cost.
Meanwhile, relations with the US remain important as the US looks to exit Afghanistan. In the previous IMF programme, no tough conditions were met in letter and spirit as Pakistan relations with the US were better before turning sour. The relations have improved in the last six months and it is time to capitalize on it. The bottom line is to take no decision on IMF today and concentrate on home grown reforms and build a strong storyline of Pakistan to sell in international market.
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