The government is debating requesting the International Monetary Fund (IMF) for a new programme loan as opposed to continuing with the Stand-By Arrangement (SBA) approved on November 20, 2008, according to informed sources. The critical question is whether this is a wise course of action.
It is patently obvious that the two conditions that were prevalent in 2008 and which favoured Pakistan are no longer there. First and foremost, elections were held in February of 2008, which accounted for the economically disastrous decision of the Musharraf-controlled caretaker government to subsidise domestic oil prices that subsequently led to an unsustainable budget deficit. Second and importantly the newly installed democratically elected government pledged economies and was believed by the donors.
The present government has succeeded in reducing the 7.4 percent fiscal deficit that it inherited to 6 percent in 2010-11, however this is much higher than the 4.2 percent agreed with the Fund team; and what is perhaps most disturbing about this statistic is the fact that 2011-12 budget overstated revenue figures by 38 billion rupees - an amount that was recently acknowledged as being inaccurate by the Federal Board of Revenue (FBR). It is little wonder that the budget for 2011-12 has failed to provide the comfort level sought by the international community.
This is evident from the fact that the scheduled IMF mission for this month was postponed yet again and this in itself is indicative of the failure of the government to meet the conditions as specified and agreed under the existing stalled SBA. To seek a new package given that the goodwill is severely compromised would necessarily imply a considerably harsher programme than the SBA. The government would also be well-advised to note that the IMF is currently engaged in providing support to many developed economies around the world as they grapple with a debt crisis and the Fund's patience with non-compliance by Pakistan would be reduced.
Additionally, the democracy dividend, plus US-led assistance, sought from the Pakistan military to wage the war on terror within our borders led to a significant escalation in aid pledges from bilateral as well as multilateral sources in 2008 and the early part of 2009. Three years later, the international donor community appears to have solidified its stance with respect to assistance for Pakistan: raise revenue from domestic resources preferably by taxing the income of the rich, notably landlords, that remains exempt under our tax laws and initiate reforms targeted towards achieving transparently accountable good governance. The killing of Osama bin Laden and accusations that the Pakistan military remains engaged in protecting some Taliban elements as well as statements made by Musharraf acknowledging that the army routinely diverted funds specifically meant for use for the war on terror to our border with India have compromised prompt payment under the Coalition Support Fund (CSF) as well. In other words, the government is unlikely to realise its external loan target of 287 billion rupees (3.3 billion dollars approximately) for the 2011-12.
This would be particularly relevant for programme loans, meant for budgetary support. The budget for the 2010-11 estimated programme loans of 80 billion rupees whereas only 39 billion rupees (around half) were received. In 2011-12, the government envisages 118 billion rupees of programme loans, a highly optimistic estimate at best. In short, there will be greater reliance on bank borrowing, which a more pliant State Bank Governor would be compelled to approve, a highly inflationary policy with serious repercussions on the poor.
What is of extremely serious concern to economists, local and international, is the fact that the federal government appears rather nonchalant about its economic team as indicated by the fact that in the past three years we have witnessed four finance ministers, four finance secretaries and three governors of the State Bank of Pakistan. At the same time, the Accountability Law remains pending in the National Assembly and few are convinced that the country is headed towards good governance.
Be that as it may, the economic team members of the past three years were all convinced about what policies to implement, namely to reduce the budget deficit, preferably by reducing current expenditure as opposed to development expenditure, increase revenue by taxing the income of the rich, and thereby reduce the budget deficit, which would reduce reliance on foreign assistance and on domestic borrowing. However, political considerations over economic concerns remain the order of the day third year running. Until the people of this country begin to use their vote for performance rather than casting their vote on the basis of tribal or baradari considerations little will change.