WHEN the caretaker prime minister’s adviser for finance Dr Shahid Amjad Chaudhry reported on his return from the US that his visit ‘went extremely well,’ as the IMF made an offer of about $5 billion in Extended Fund Facility, he was not correct, or had been misled.

Speaking during a press conference last week, Chaudhry was referring to his talks with the IMF while he was attending spring meetings of Breton-Wood institutions.

However, the IMF offer had been on the table since November last year, and its details had been finalised but fell apart due to an internal rift between two groups within the economic team, with then finance minister Dr Abdul Hafeez Shaikh and finance secretary Abdul Wajid Rana on one side, and Minister of State Saleem H. Mandviwalla and State Bank of Pakistan Governor Yasin Anwar on the other.

This confused President Zardari and then Prime Minister Raja Pervez Ashraf in taking a final decision, and increased the country’s economic vulnerabilities. Consequently, the newly elected government, under desperation, may have to sign a new programme, which has been agreed upon in principle.

When pointed out, Dr Chaudhry denied that the IMF had previously offered the new programme, and said had that been the case, he would not have been invited by the caretaker prime minister to lead the delegation to participate in World Bank-IMF spring meetings.Official records, however, indicate that the ministry of finance had earlier declined an IMF offer in November 2012 for a fresh standby arrangement (SBA), which it considered non-concessional.

Dr Hafeez Shaikh and Mr Wajid Rana saw foreign exchange reserves declining to about $6 billion before June. They finalised the parametres of the new Extended Fund Facility (EFF) programme on the argument that the government should take action much before a crisis emerged, and that if the crisis did happen during the caretakers’ tenure, it would be difficult to handle it.

Meanwhile, the group comprising Mr Yasin Anwar and Mr Mandviwalla insisted they did not see any crisis, projecting reserves at over $8 billion, and hence felt no need for an IMF credit. Mr Anwar even claimed that he could arrange a couple of million of dollars from friendly countries.

Due to these differences, a visiting IMF mission told journalists in Islamabad on November 18 that it was willing to extend a new programme, provided there was a deep and broad political ownership of the new reform agenda. The agenda agreed between the finance ministry and the IMF mission was accordingly provided to former finance minister Ishaq Dar.

However, as the differences continued, the IMF mission postponed its scheduled visit for December 28. In subsequent engagements in Washington DC in January, then Pakistani Ambassador to the US, Sherry Rahman, complained to President Zardari that the finance ministry was readying to sign a new programme with the IMF.

During these talks, the IMF had offered that if the PPP government signed the new programme, it would be ready for a substantive review of the programme with the next government — an offer that was deemed better when compared with a similar programme for Egypt.

On January 29, Dr Hafeez Shaikh and Wajid Rana gave a fresh briefing to the president and the prime minister, and explained the entire EFF programme that had been agreed with the IMF. They informed that $5 billion in IMF assistance would be supplemented by $2 billion in funding from the World Bank and the Asian Development Bank.

On that night, the programme was to be cleared by the president, with the understanding that its announcement would precede the date of the new elections. But opposition from the other side continued. Meanwhile, the IMF mission had agreed to take the programme to its executive board in its meeting on March 6. But that never materialised.

IMF’s offer for the Stand-By Arrangement (SBA) was declined as its repayments became due not at the end of entire disbursement, but three years after each installment. It also involved focus on broad policy issues that were difficult to implement in the short- term, and were also considered expensive.

The failed 2008 SBA involved an interest rate of 3.5 per cent (300 basis points as interest plus 50 basis points as service charge). Adjusted for rupee depreciation against the dollar and the special drawing rights (SDRs), the effective interest rate worked out at around 10 per cent. Given the fact that its disbursement was quicker, the fiscal adjustment also had to be made urgently.

In comparison, the EFF involved an effective interest rate of about nine per cent, and was repayable between four-and-a-half years to 10 years, which gave the government the flexibility to implement structural economic adjustment over a longer period of time.

The SDR interest rate, drawn on a basket of four major currencies (euro, Japanese Yen, dollar and British pound) currently hovers around 0.7 per cent, which, when coupled with EFF’s interest rate of 200 basis points, works out at about three per cent. Pakistan’s quota with the IMF currently stands at about 1.1 SDRs, and since it would be availing 300 per cent of its quota, the total size of the programme works out at 3.5 SDRs, or $5.25 billion (1SDR=1.5$). In net present value terms, too, the EFF becomes comparatively cheaper, given its longer repayment schedule.

According to the IMF, EFF is provided to a nation that faces serious medium-term balance of payment (Bop) problems, including those that limit private capital options due to structural weaknesses. The facility is considered helpful for a country facing low economic growth and an inherently weak Bop position.

Under the EFF agreed in principle with the IMF, Pakistan has to make fiscal adjustments of about Rs770 billion (3.5 per cent of GDP) in the first three years of implementation, i.e., fiscal years 2013-15, with a 1.5 per cent GDP adjustment in the first year. This includes raising federal and provincial revenues by an additional Rs550 billion (2.5 per cent of GDP), and a reduction of Rs220 billion (one per cent of GDP) in power sector subsidies and losses.

Additional taxation measures worth Rs550 billion would include custom tariff rationalisation through removal of SROs, improved collection, easing out of zero-rate distortions, and improvement in GST assessment related issues at the federal level. Provinces would also be required to improve their collection through agriculture income tax, property tax, motor vehicle tax and expansion in GST on services.

The reduction in power sector losses is to be achieved by improved governance of corporate entities, tariff increases for higher, middle and upper class consumers, and an increase in the recovery ratio. An adjustor has been allowed to divert subsidy savings into social protection programmes like the Benazir Income Support Programme, to mitigate the adverse impact of tariff increases.