Informed sources in the Ministry of Finance have begun referring to the possibility of the government allowing the International Monetary Fund's (IMF) Stand-By Arrangement (SBA), stalled since May 2010, to lapse and instead seek a new assistance package from the Fund of around 3.5 to 5 billion dollars. The question is if this is good thinking?
The remaining amount of the SBA is around 3.2 billion dollars so first off one would be compelled to assume that seeking up to 5 billion dollars maybe premised on either a sharp deterioration in foreign exchange reserves, which is simply not the case at present, or seeking a higher amount to allow the government considerable latitude in negotiations with the Fund. This, if reflective of the economic team's thinking, is inappropriate to put it mildly for three major reasons.
First, the IMF team is going to play the numbers game to its own satisfaction. Or, in other words, the federal government would have to provide the IMF an entire set of numbers that satisfy the team before any loan agreement is signed. In case of the IMF dissatisfaction with numbers, either in terms of revenue generation or in terms of expenditure, the deal is unlikely to go through. The recent major faux pas by the Federal Board of Revenue (FBR) with respect to net collections on the last day of fiscal year 2010-11 has, without doubt, raised the level of IMF mistrust with the figures estimated by the economic team. This, no doubt, would be a key element in determining the success of the talks whenever the government submits targets/claims to the Fund as a prerequisite to begin negotiations on either a new package or indeed to reactivate the stalled SBA.
Second, the stalled SBA is a reflection of the government's failure to comply with the agreed programme conditions. That conditions are definitely going to be considerably harsher in the case of a new programme stands to reason. And given the IMF mistrust, it is very likely that the IMF team may focus on a large number of pre-programme conditions, whereby implementation would be prior to the loan agreement and release of a tranche. And finally, with the economic meltdown in several Eurozone countries leading to a growing number of economies with unsustainable budget deficits seeking assistance from the IMF global resources to bail out the Pakistan economy once again, given major governance issues both in terms of tax collections and expenditure, is unlikely. Additionally the US had played a critical role in successfully persuading the Fund to support Pakistan during the last three fiscal years, however, with strained relations it is unlikely that the US will use its clout in the IMF to ensure support for Pakistan.
But, the economic team may well argue, Pakistan is entitled to IMF assistance, which is premised on our quota. According to the IMF website Pakistan's quota is 1,033.7 billion SDRs (0.43 percent of total) with one dollar equivalent to 0.67734 SDR. There is therefore no deterrent for Pakistan to receive more assistance from the Fund based solely on its quota. The deterrent, however, is a growing mistrust between what the Pakistan economic team promises - promises/commitments as incorporated in the policy documents, including the budget which have consistently proximated towards IMF conditions - and what it has delivered and by that logic is able or willing to deliver in the future.
So where does economic salvation lie for Pakistan? If the economic managers are going to seek yet another package, thereby allowing the existing SBA to lapse, then one would urge the economic team to place the draft agreement with the Fund in parliament. It is critical that any future IMF programme be debated in parliament and voted on, so that the team can legitimately inform the Fund staff that the country's entire parliament is behind it.
Short of that it is now clear that the Fund staff are unwilling to accept promises/commitments especially those contained in the budget for 2011-12 because of the following: (i) the FBR Chairman, for at best not verifying that the figures he presented in his press conference were gross and not net and, at worst, being complicit in overstating revenue figures in an attempt to appease the IMF concerns that revenue generation has been better than expected; (ii) inaccurate information on external resources in 2010-11 as provided in the current year's budget, the prerogative of the Economic Affairs Division; (iii) failure to impose the value-added tax to the extent agreed; and (iv) failure to eliminate the inter-circular debt as promised by the Finance Ministry in its Letter of Intent submitted to the IMF.
However, in case the economic team opts for the better option namely to stay with the SBA then too it is advisable to lay the details of the SBA loan agreement with the Fund in the parliament. True, the agreement has already been signed and committed to by the government, even though the Finance Minister and the State Bank governor who signed on the dotted line on Pakistan's behalf are long gone, yet if parliament's voting results reveal that those against certain tenets of the remaining conditions of the agreement are in the majority then too the government would be in a stronger position to renegotiate the stalled SBA terms than it is now.
Pakistan is a perennial borrower from the Fund and the PPP, the PML (N) as well as military strongmen have all borrowed from the Fund when in government. There is no doubt that the country remains economically fragile due to (i) the tendency of governments (civilian or military) to overburden those already taxed rather than to tax the rich and the influential, (ii) utilities are priced progressively higher rather than government departments/ministries compelled to clear their bills, (iii) current expenditure is never slashed in the event of an unsustainable budget deficit while development expenditure that creates jobs and thereby disseminates wealth is, (iv) accountability remains the prerogative of the centre that continues to be lax in going after the corrupt - be they politicians, bureaucrats or military men; and last but not least (v) mega-scandals are left to the courts to pursue and in case of involvement of government loyalists the investigation that would lead to a guilty verdict is compromised. There is a solution to all these issues however they appear insurmountable because of a complete lack of political will.