The IMF decision

Updated August 02, 2019

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The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.
The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

AS the PTI government took the reins of administration in August last year, the most pressing and immediate concern was how to address the severe economic crisis at hand. The country’s ability to meet its external payment obligations was melting down by the day, while the fiscal imbalance was out of control.

Examining the numbers will help illustrate the dire situation inherited by the government. The gap between exports and imports in 2017-18 stood at $37.6 billion, the largest in the country’s history. The external current account deficit (arrived at by adding other inflows and outflows to the merchandise trade flows) had crossed $19bn — once again, the largest in absolute terms Pakistan had ever experienced. The gross external financing requirement — adding external debt repayments, foreign investment outflows etc. to the current account deficit — was an unprecedented $27bn. With debt repayments expected to rise sharply from 2018-19 onwards, Pakistan’s foreign exchange requirement was projected to remain elevated for the next few years, despite import compression.

On the fiscal side, the budget deficit had breached 6.6 per cent of GDP, or Rs2.3 trillion. Naturally, the magnitude of the unfolding economic crisis took a toll on confidence and the markets, with the rupee experiencing sharp declines. The currency slide added to the sense of urgency for the government since it was feeding into both inflation as well as panic in the markets. With official foreign exchange reserves under pressure, and no confirmed new commitments in sight, the State Bank decided to conserve its forex to honour sovereign payment obligations in a timely manner.

Also read: Has IMF money ever saved us in the past?

In these circumstances, what was concentrating minds the most was the IMF question. While ordinarily, approaching the IMF for an emergency assistance programme in such a situation would be taken by policymakers without too much hesitation, in this case the context was all-important. Firstly, the prime minister had ruled out going to the IMF in election rallies. He believed the Fund imposed unnecessary and avoidable hardship on a receiving country’s population. His nominated finance minister fully agreed, while also possibly harbouring the suspicion of many in Pakistan that the Fund is more a weaponised institution of influence and control under US stewardship than an ‘ordinary’ international lender of last resort.

The prime minister took arguably the most difficult decision of his career.

This suspicion was not without basis. The IMF’s own Independent Evaluation Office had judged in its inaugural report in 2002 that Pakistan, together with the Philippines, were two cases where geopolitics played an important role in Fund programme decisions. In addition, repeated statements by senior US officials had also signalled their intention to lean on Pakistan via the IMF. The FATF story was also playing out in the background. The fact that FATF benchmarks have been intertwined with IMF programme conditionality in a most unprecedented manner has validated all the concerns.

Two other considerations were on the table. The IMF programme would have stringent ‘front-loaded’ conditionality that would unleash inflation, unemployment and impoverish parts of the middle class. This would in turn rapidly erode the political capital of the new government. A sharp fall in political capital would not allow the government the space and latitude to pursue its agenda of providing low-cost housing etc. while also potentially seriously impairing its ability to pursue its own wider reform programme.

Finally, a genuine reservation regarding IMF programme design was whether it was aligned with the requirements of structural reform the country so badly needed to undertake. After all, Pakistan was heading back into a second consecutive IMF programme barely two years after ‘successfully’ completing one. Ultimately, the questions boiled down to: was an IMF programme loaded with stringent conditionality the only option? How viable were the non-IMF options, if any, on the table? And were the consequences of Plan B any different materially from those under the current IMF programme?

While the government grappled with the complex issue of approaching the IMF, and reached out to friendly countries for assistance, the resultant delay was increasing the uncertainty and adding to a sense of panic. However, it would be wrong to lay the blame on the delay alone. It was clear from early on unfortunately that the PTI government had not done its homework before taking over the reins of power and was woefully ill-prepared. Prior spadework had not been done, the severity of the crisis appeared to have been completely misread and underestimated, and there was no stabilisation plan to put into effect from day one. In addition, a most critical element in providing confidence to markets, strategic communication, was completely absent.

In this backdrop of rising confusion and near panic, the prime minister took arguably what is likely to be the most difficult decision of his tenure. He overruled his finance minister and decided to reach out to the IMF. A couple of months later when the IMF leadership (and apparently the US administration) complained about the approach of the then-finance minister, who was stonewalling the Fund on some of the most stringent conditionality, the prime minister decided to replace him to fast-track the process and reach quick closure with the IMF. In hindsight, approaching the Fund appears to be the correct decision. Plan B was not funded and would have created more disruption while prolonging the uncertainty.

Now that the IMF deal is done, and Pakistan has embarked on a robust stabilisation programme, what more can be done to ensure a quick transition to jobs-creating growth? Work on SEZs under CPEC is stalled, and giving it attention and a vigorous push can kick-start an important growth driver. In addition, the government should ensure pending tax refunds are expedited and FBR does not harass businesses in its hunt for taxes. The ridiculous and disruptive anti-encroachment drive should be halted. Thousands of small businesses have been needlessly demolished in a harsh economic environment. The government should seek to lessen the costs of disruption under stabilisation, not amplify them. Finally, improving strategic communication with markets and investors regarding its forward-looking plans still remains a to-do item.

The writer is a former member of the prime minister’s economic advisory council, and heads a macroeconomic consultancy based in Islamabad.

Published in Dawn, August 2nd, 2019