The principle of international economic law prescribes foreign exchange stability of the member countries and it recognizes that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and which sustains sound economic growth. The principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability.
Each member undertakes to collaborate with the International Monetary Fund (Fund) and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. Hence, whenever the member countries face erratic disruptions in their foreign exchange market or where the price stability is threatened or when the foreign exchange reserves are inadequate members approach the Fund for the support. An overvalued currency shall make the imports cheaper whereas an undervalued currency will make exports of member competitive.
Pakistan's currency is in 'managed float' mode although officially it is on 'free float' dictated by the market conditions. The managed float is achieved by prescribing upper and lower bands beyond which State Bank of Pakistan's intervention is triggered. However, due to growing debt burden, deficits (fiscal, current account), falling exports and increasing imports, the rupee is in free fall and unless it is corrected, foreign exchange reserves shall be insufficient to support balance of payments or deficits. That is what happened recently in case of Pak rupee when the central bank was forced to depreciate the value.
This situation is further aggravated by the wrong policies of the government initially which discouraged the foreign direct investment and put up red flags and barriers to the inflows of capital. While the OECD countries are the biggest beneficiaries of the ill-gotten wealth of the developing countries, we are ensuring flight of capital and are not respecting the laws enacted by the Parliament which are intended to provide immunity so that money is brought back, voluntarily. Pakistan's efforts to bring back laundered money or the money gained through corruption can be traced to more than two decades. This has largely remained unsuccessful due to lack of understanding of economic and financial laws and the evidence requirements pursuant thereto, not being met. With insufficient dollar reserves or dollar income we have to look for foreign exchange support.
Pakistan was constrained to approach the Fund and now implement its prescriptions for purposes of stability of markets and for general assessment of the economy that will allow other multilaterals to follow suit and pose confidence through lending. This shall further translate into improvement in the credit rating and with higher credit rating markets will respond positively and equity or investment will start flowing. Hence the debt and equity credentials will be established. This has been manifested in past five to six months. It is wrong to suggest the approach to the Fund for support is a loan. The facilities granted by the Fund are for the purposes to overcome the balance of payment problems.
Apart from the poverty reduction and growth loans, Pakistan has been accessing the general resources account of the Fund from time to time with the biggest purchases of SDR 4.1 billion in year 2008-2009 and then SDR 2.8 billion in year 2014-2015. As of 30th September 2018, the total outstanding purchases and loans from the Fund equal SDR 4.2 billion and therefore the SDR quota that is available to Pakistan is 321.42 million whereas the SDRs available to Pakistan are 2.03 billion. Pakistan has entered into 21 arrangements with the Fund since its membership on July 11, 1950. As of today, the total amount outstanding against Pakistan is under the Extended Fund Facility amounting to SDR 4.273 billion. Pakistan has availed Extended Fund Facility, Stand-By Arrangement, Extended Credit Facility and Structural Adjustment Facility under the Fund programmes. Pakistan has a fiscal space to access its quota of SDR 2 billion.
Pakistan may access the general resources of the Fund through standby arrangements with prescription of conditionalities to ensure surveillance of the economic conditions or may also repurchase the Special Drawing Rights (SDRs) in accordance with their entitlement and quota.
Article V Section 3 (a) of the Fund Articles requires the Fund to adopt policies on the use of its general resources for balance of payments problems:
The Fund is required to adopt policies on the use of its general resources, including policies on standby or similar arrangements and, may adopt special policies for special balance of payments problems that will assist the members to solve their balance of payment problem and that will establish adequate safeguards for the temporary use of the general resources of the Fund. Such policies are manifested in the standby arrangements and extended fund facilities. A balance of payments problem may have different causes but will manifest itself through balance of payments deficit and or low reserves which meanweak foreign exchange, gold, special drawing rights, reserves position in the Fund. The Fund's assistance shall be used to finance the deficit and or strengthen the country's reserves. Therefore when requesting a purchase a member must represent that it has a need to make a purchase because of its balance of payments problems or due to negative development in its reserves.
To access Fund resources, member countries are required to agree to a number of conditionalities, which maybe bracketed in three categories: the first conditionality is found in the Fund Articles and the policies adopted by the Fund under the Articles whereby special policies for special balance of payment problems for example Extended Fund Facility are specified in accordance with the different level of access, maturities and charges. Both general and special policies must assist members to solve their balance of payment problems with adequate safeguard for the temporary use of the general resources of the Fund; the second type of conditionality is found in standby and other arrangements and which include two types of conditionalities - performance criteria and reviews. The performance criteria are objectively defined and implementation is monitored through reviews for a particular purchase. Performance criteria are conditions not obligations; the third layer of the Fund conditionality is based on negotiations between the Fund and the member countries requiring taking of prior actions or the meeting of benchmarks and form the basis of the staff recommendations to the Board of IMF for approval and hence are critical even though not mandatory or binding. Perhaps the depreciation of the rupee, increase in the price of utilities and increase in scope of taxes are prior actions required by the Fund for considering the request of Pakistan to access its general resources. The scope of the conditionality as part of standby arrangement is confined to macroeconomic variables and policies adopted under the Articles.
Hence it is in the interest of Pakistan to access the IMF for ensuring the stability of the markets and ensure continuity of the foreign direct investment and continued confidence by the international financial institutions and money and capital markets. Pakistan should always negotiate the terms and conditions of the Fund conditionalities with concrete prior actions and benchmarks, achievable performance criteria and last but not the least implementable macroeconomic targets. In this manner, it can enter into structured negotiations with the Fund with full ownership and in line with the economic objectives of the Pakistan. Any weak negotiations resulting in acceptance of high benchmarks and targets results in missed targets, stricter enforcement and discontentment at popular levels which must be avoided at all costs. It is imperative the governments' negotiation team include not only financial experts but skillful legal negotiators and experts.
(The writer is practicing barrister with focus on corporate, economic and financial laws)
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