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The next IMF deal

Updated September 03, 2013

THE International Monetary Fund board will be meeting tomorrow, Sept 4, to review Pakistan’s application for support.

It is a foregone conclusion that the board will approve the programme designed by the Fund’s staff to grant us financing of at least $6.6 billion over the programme period. It will also sanction the release of the first tranche of the loan on the grounds that the country has completed the ‘prior actions’ required to qualify for these funds.

This writer has argued in these columns before that, contrary to the general perception and the expectations of most commentators, the programme will be relatively soft in terms of its coverage of the long overdue structural reforms needed to address our fundamental issues. This will essentially be for two reasons:

a) The Fund, despite all claims, does not really understand structural reforms. This is partly because of its restricted mandate and short-term engagement with a country — the typical time period of a Fund programme is inadequate for carrying out structural and institutional reforms. The Fund is only interested in attaining macro-economic stabilisation, whose focus is limited to budget deficits and interest and exchange rates.

b) The greater part of the nature, scope and extent of the stringency of programme actions and performance criteria that we will be required to meet will revolve around the timetable of the American retreat from Afghanistan.

So, what is this programme likely to look like? Barring the upward revision in electricity tariffs (possibly mild where adjustment in rates applicable to domestic consumers is concerned) and the likely demand for fiscal adjustment measures to achieve a deficit reduction by 2pc of GDP the government has ambitiously committed to in this year’s budget, the bulk of the supposed actions will be embodied in meaningless English sentences. The latter will betray the underlying intent to bail us out to make the safe passage home for American troops in Afghanistan less painful and less expensive.

This writer for one will be least surprised that to ease Pakistan’s access to funds, the majority of the ‘prior actions, ‘structural benchmarks’ and ‘performance criteria’ will involve implementation of amusingly harmless and simplistic measures.

This will make access to funding easy so that we can avoid a default-like situation and stem the growing pressure on the rupee. This would also make it justifiable and ‘convenient’ for the IMF to give us money and thereby recover what it had lent to us under the previous programme.

Examples of what we could be required to do would include:

a) sending out a few thousand tax notices to alleged tax evaders;

b) announcing a plan for rationalising gas prices;

c) development of a strategy for restructuring state-owned enterprises;

d) if we are to believe the leaks in the press on this one, the State Bank to buy $125 million from the market (resulting in the fall in the rupee’s exchange value;

e) maybe there could be a reference to the disposal of a small percentage of the shares of one or two government-owned corporations as a declaration of intent to privatise some of these entities;

f) legislative amendments to give the State Bank additional autonomy (as if it has been able to exercise whatever autonomy it already has), etc.

And all such ‘brave’ reform measures will have to be undertaken before June 2014 to become eligible for the financial assistance built into the programme.

I, for one, doubt that the fresh deal will make any serious demand for key reforms like elimination of the SRO regime, steps to extend the span of general sales tax further down the value-chain (to the retail level), etc.

Press reports suggest that there would be a reference to the need for provinces to generate cash surpluses to enable the federal government to meet its expenditure obligations. This would be a ludicrous demand, one which the provincial governments of Sindh and Khyber Pakhtunkhwa will understandably ignore.

How can the provinces be prevented from spending what they generate from their own tax effort or for that matter what they receive under the statutorily protected National Finance Commission award? But then the failure to meet this conditionality will not result in any stoppage of the flow of IMF funds.

If the country is found to have met, say, six out of eight conditionalities the IMF staff and board will, after due deliberation, take a sympathetic view. It will allow the release of funds, arguing that although the programme execution has been uneven the reforms are moving forward and the authorities have reaffirmed their intention to achieve the targets and criteria.

Allah be praised for the drafting options available in the English language and the wide array of vocabulary it provides if you wish to favour friends, even when they have clearly not achieved much by way of critical reforms.

To conclude, the fears of a tough IMF programme, especially the toxic nature of its first year’s conditionalities, are misplaced. Thus, the fulfillment of the requirements of the first year of the programme and the quarterly disbursement basis are not likely to make us, yet again, a ‘one-tranche country’ with the IMF.

Instead of feeling anxious we should relax in the express knowledge that it will not be as bumpy a ride as is being dreaded. If we end up having to tighten our belts it will be in spite of the IMF.

Meanwhile, the US troops will be back at home with fewer casualties than the current apprehension and the Fund staff which designed this programme will get their customary promotions as well as accumulate a tidy sum of frequent flyer points from their regular visits to Pakistan. We couldn’t hope for a more perfect confluence of interests of all potential stakeholders.

The writer is a former governor of the State Bank of Pakistan.