IN an article (Nov 28) by this writer and Dr Hafiz Pasha, it was argued that the current account deficit, having ballooned to $1.2 billion per month, was painting a grim picture. Dwindling foreign exchange reserves would get squeezed further, unless large volumes of funding were available to finance a potentially massive gap for 2017-18. An outcome easier to hope for than for it to materialise.
Doing nothing and merely placing faith in half-hearted policy measures supplemented by more borrowing to stave off these pressures would be unsustainable, the recent flotation of bonds having bought us only a few months.
Our analysis had shown that contrary to the argument that categorising the present situation as a crisis exaggerated the extent of the problem, that the debt-to-GDP ratio was manageable and the present challenges were of a transitory nature, less severe than those of 2008. Any reference to a controllable debt-to-GDP ratio is irrelevant, being a stock issue, whereas we are confronted with the financing of a flow issue, the sheer need for liquidity of such magnitude.
Editorial: Fiscal Stress
We had argued that a speedy rebound in this deficit to more maintainable levels will necessitate sustained an annual increase in exports, along with a moderate increase in imports so that the 2016-17 trade deficit of $26.6bn is reduced significantly.
Several initiatives would have to be launched for achieving these results. To this end, we had earlier proposed measures to manage this transformation without having to resort to the IMF. And these efforts may still have to be accompanied by adequate amounts of external inflows for reserves to get back to covering roughly three months’ imports. All this will take some doing!
A delayed response, however, to address these stresses may well force us to knock on the doors of the Fund.
As we tiptoe into the IMF’s parlour will we get a frosty reception?
What would be the response of the IMF to such a request? As we tiptoe into the IMF’s parlour will we get a frosty reception? Or will the Fund choose the path of least resistance and endorse ad hoc, weird revenue-generating measures (instead of systemic reforms), senseless ways of squeezing expenditures and look the other way if we neither discharge nor recognise known obligations, as they did in the previous programme? Simply to show the achievement of some fictional fiscal deficit?
So, will the resultant programme be harsh and rigid or as benign in its design and stringency of execution as the previous one (over a dozen waivers were conferred to enable us to declare a ‘successful’ completion)?
The IMF is not likely to talk to a government with a remaining life of seven to eight months or the caretaker setup, especially when big moves supposedly have to be made to tackle the problem. It will negotiate only with a new government that has a mandate to run the country during the currency of the programme. What is not clear is the degree of appetite in Washington for a programme double the size of the previous one to finance a current account deficit of this scale.
However, one can visualise that this time around when the department within the IMF assigned to negotiate with Pakistan shares the contours of a new programme with other departments (the obligation of their internal review process), it could be hauled over the coals by the others. Since we would be accessing the window of the IMF so soon after the previous programme, institutional memory would still be reasonably fresh.
This department could face criticism for having painted a rosy picture, by giving assurances that the implementation of the previous programme had proceeded satisfactorily. In their defence, they, rather like the US generals accusing Pakistan for their failure in Afghanistan, can be expected to blame us for being a recalcitrant, untrustworthy partner.
Unfortunately, they are likely to get away with such an accusation given the sharp deterioration of fiscal and external accounts since the IMF programme ended last September.
They would argue that having used more than $5bn of the $6.2bn IMF money to defend the rupee we had raised $2.5bn through Euro and Sukuk bonds to repay the much cheaper IMF debt; although excessive global liquidity having contributed to the decline of the risk premium (lowering interest rates) on sovereign bonds of emerging economies also benefited us.
Our track record of abandoning 12 of 17 previous Fund programmes will endorse their claim that we are incurable non-reformers, and that we go back to our merry ways as soon as some semblance of macroeconomic stability is attained. It would be rational to presume that this department, to remain on the right side of all concerned within the institution, would prefer playing safe and readily accept the suggestions of others on the range and harshness of additional benchmarks and performance criteria.
This may well result in programme cluttering and overload, which could then be destined to fail within a year, unless we can convince the Fund that we should not be judged based on our past behaviour and demonstrate this through a level of commitment not experienced by them.
And such a programme could possibly include the following difficult performance criteria: a hefty adjustment in the rupee’s value, privatisation of at least one Disco (Fesco or Iesco) and flotation of an international invitation for bids for PIA’s privatisation — the latter two the unfinished agenda of the previous programme. Single-minded implementation of prior actions and measures will be essential. The other targets and performance criteria would, as argued, be expected to be somewhat more stringent than under the previous programme.
Since we’ll need the IMF’s Extended Fund Facility the quantum of funding would be restricted to our remaining quota, calculated as the difference between our cumulative maximum entitlement of 435 per cent of our quota (which can be raised to 500pc in exceptional circumstances) of approximately $3bn and the $6.2bn already drawn. It will also be instrumental in mobilising other donor funding.
However, lest we forget, the size and conditionalities of the programme would be critically dependent on the attitude of the key player in the Fund, ie the US.
The writer is a former governor of the State Bank of Pakistan.
Published in Dawn, December 5th, 2017