KARACHI, Nov 20: Pakistan has not availed of the last two tranches of $250 million each for which it was eligible under the IMF Poverty Reduction and Growth Facility (PRGF) due to expire early next month.
While it was earlier known that Pakistan would not seek a successor arrangement when the current three-year PRGF agreement expired in early December 2004, the announcement made by Prime Minister Shaukat Aziz that his government had declined with thanks final instalments from existing credit line came as a bit of surprise.
The decision coincides with a move to curb speculation in a liberalized foreign exchange market. The State Bank recently took over from commercial banks the responsibility to pay for the soaring oil import bill. It was an extraordinary measure to respond to an extraordinary situation. Steps were also taken to put procedural curbs on imports which were later relaxed. These measures helped strengthen the rupee and stabilize the exchange rate needed to maintain the momentum of industrialization. It is difficult for the policy-makers to work with consistency in a volatile financial market that often tends to thrive on speculation. Brief official intervention becomes necessary to discipline the market.
It is after decades that domestic demand is being triggered by investment and economic growth have been driven primarily by the manufacturing sector. Once again the industrial lobby is acquiring muscle. And the key elements to keep the momentum of growth are: stable exchange rate, low interest rate and competitive corporate tax. And it is cheap energy that fuels economic growth.
The government has so far spent some Rs22 billion to subsidize domestic petroleum prices and more on imported wheat and fertilizer. Wapda and KESC are surviving on subsidies. TCP is now playing a major role in commodity trading and exports. It re-establishes the state's role in trading to take care of the market imperfections. The SROs are once again back in currency. These are measures that do not conform to the spirit of the market reforms.
The first generation of reforms carried out in the last five years is too narrow and shallow as indicated by quick reversal in macro-economic trends. Official policies have failed to contain inflation while they keep explaining the factors responsible for it. Exchange rate stability has been achieved through a major State Bank intervention. Economic growth has picked up as official development spending gradually doubled from $100 billion to $200 billion, funded by external loans and credits, bulk of which is provided by multilateral donors like the World Bank and the Asian Development Bank.
While all major donors like the IMF, the World Bank and the Asian Bank have been on board, it has not helped mobilize foreign investment to any desirable level. Often a strong presence of the IMF in any country discourages foreign investment as it indicates that the borrower is still not out of the woods. And the domestic compulsions often conflict with the IMF's reform agenda.
Pakistan will, however, remain engaged with the IMF and seek its advice and technical assistance for the second generation of reforms. With improved economic fundamentals, the IMF credit is no longer required for balance of payments support. More than economic assistance or investment, the emerging domestic market needs access to developed markets to be able to finance growth and service debts through export earnings. And it must also have access to the financial markets to reduce its dependence on multilateral donor agencies.
