THE IMF is considered the financial doctor of the last resort. A core function of the Fund is bailouts to countries struggling to meet international obligations in return for implementing agreed conditionalities. Programmes focus on balancing budgets, creating market-based exchange rate regimes, privatisation, liberalising trade and easing capital flows.
Most IMF-supported programmes in Pakistan have ended short of the finishing line. The country could not complete the agreed programme arrangements. The only programme successfully completed was in 2016. The key takeaway from that experience is that astute management of the programme by the country is essential. A professional team, which one was honoured to support, contributed to framing the Memorandum of Economic and Financial Policies (MEFP) on which the programme was based. Regular follow-ups by Pakistan ensured implementation of the benchmarks.
The second takeaway is that completing an IMF programme is a necessary, but not sufficient, condition for prosperity. A programme may alleviate a balance-of-payments crisis, but much more is required to cure the underlying ills and prevent crises from recurring. Pakistan seems to have missed out on this count. The third takeaway is that the design of the programme determines the quality of the path of fiscal and external sector adjustments.
There is a cost to bear for programme adjustments, which can fall hard on the people. It tends to erode a government’s political capital and restrict its decision-making capacity.
An IMF programme is not sufficient for prosperity.
Currently, the IMF can help overcome Pakistan’s dollar liquidity crunch. The crisis has been exacerbated by the delay in completing the seventh review; resultantly, there was a drawdown of reserves to $7.6 billion as of Aug 29, 2022, a whopping fiscal deficit of Rs5,280bn, an un-financeable current account deficit of $17.4bn in FY22 and the rupee’s disorderly movement.
A review of the IMF’s Extended Fund Facility for Pakistan can help develop realistic expectations of outcomes. The continuation of exchange rate flexibility, a restrictive monetary policy stance, rationalisation of energy prices and cuts in fuel and power subsidies are key adjustments. Increasing the petroleum development levy to Rs50 per litre has been agreed on at a time of inflation.
Fiscal adjustment overall is envisaged at around three per cent of GDP for FY23 — unprecedented in our history and an uphill task. Bolstering revenues is suggested through an assortment of taxation and contingency measures. It is encouraging to see some action on the revenue administration side, an area requiring the most focus. On the expenditure side, lukewarm measures such as the ban on some purchases and cutting travel and utilities are part of the current MEFP. It is striking that investment is estimated to rise to 14.7pc of GDP in FY23, in spite of contractionary policies — an aspect needing revision.
Routine measures include updating the debt strategy along with the implementation of an AML/CFT framework and the capitalisation of banks. Income support programmes and the social sector are to increase in size and coverage — a good sign.
We developed a circular debt management plan in 2014. It continues to be mentioned in the area of structural reforms in the MEFP. Renegotiating Power Purchase Agreement terms is envisaged. Converting expensive government-guaranteed debt in the power sector into cheaper public debt is planned. This translates to a bailout of the power sector by the taxpayer and may be reconsidered. Pursuing mild reforms like private participation in DISCOs may be fair under the MEFP. However, restructuring DISCOs requires much deeper thinking.
A state-owned enterprise law is required to be passed, when most SOEs already function under the Companies Ordinance 2016. Some minor banks form the divestment agenda. Privatisation of SOEs needs a Herculean effort, far beyond that envisaged under the MEFP.
To boost macroeconomic sustainability, the IMF lays (on the monetary side) a floor on the State Bank’s net international reserves and has a ceiling for its net domestic assets.
Our best expectation for FY23 is some reduction in twin deficits, easing of adverse external financing conditions, a possible uptick in State Bank reserves and slower growth, with higher inflation (largely coming from cost-push factors). The floods have created another reality that requires the macro framework to be rethought. The focus of this article has been on policies under the current MEFP, which do not incorporate the floods’ impact.
Binding constraints on sustainable growth are likely to persist even if Pakistan completes the programme. Weak economic governance, a structurally ailing energy sector, low productivity in the farm sector, an inward-looking industrial sector and burgeoning pensions are Pakistan’s fundamental issues that need to be solved.
Published in Dawn, October 1st, 2022