Rebuilding trust with the IMF

Published July 21, 2023
The writer is a former senior IMF adviser. He represented Pakistan on the IMF Executive Board from January 2020 to January 2023 and has a PhD degree in economics from the University of Cambridge.
The writer is a former senior IMF adviser. He represented Pakistan on the IMF Executive Board from January 2020 to January 2023 and has a PhD degree in economics from the University of Cambridge.

THE International Monetary Fund has now approved a $3 billion nine-month Stand-by Arrangement with Pakistan, to support its urgent external financing needs.

This SBA builds on the long-drawn negotiations between Pakistani authorities and the IMF for completion of the ninth review under the 48-month Extended Fund Facility (EFF) programme, which for a variety of reasons remained incomplete and expired in end-June 2023.

For the most part, the incomplete programme’s implementation remained uneven including due to the Covid pandemic and floods. What is worrisome is that, on occasions, the programme saw policy reversals and slow progress in the implementation of agreed structural benchmarks and targets, partly owing to intense political developments.

These caused deep mistrust with the Fund’s staff and management and resulted in the loss of the country’s credibility, besides causing a colossal loss to the economy.

Nonetheless, the difficult situation was resolved after interactions between the prime minister of Pakistan and the IMF’s managing director, and only after the authorities took all the measures to the satisfaction of the Fund staff.

However, the incomplete programme has left a legacy of confidence crisis between the Fund and Pakistani authorities that must be overcome. Thus, reflecting on where we went wrong in the IMF programme and how to avoid those mistakes in a future engagement with the Fund is in order.

This is important since Pakistan’s new government, once elected, will need to negotiate a successor EFF programme to address its medium-term balance-of-payments problems.

Reflecting on where we went wrong in the IMF programme and how to avoid those mistakes in future is in order.

Granted that during the course of the 2019-2023 EFF programme implementation Pakistani authorities at times wavered in implementing their policy commitments. Notably, soon after the completion of four combined reviews in March 2021, the authorities reversed policies and programme commitments.

Such actions were seen by the Fund as the lack of ownership of and commitment to economic policies and targets agreed under the programme. Thus, despite the support during the pandemic, the IMF staff was not as flexible during the 2022 floods.

In the wake of these floods, the IMF team was apprehensive of the intent of the government to implement policy commitments. Repeated assurances by the government to complete the ongoing programme went unheeded.

Amid increasing political noise, the Fund while adopting a ‘wait-and-see’ approach did not dispatch its mission to Pakistan to undertake discussions on the ninth review until February 2023, which was originally scheduled for October 2022.

Pakistan’s difficult macroeconomic situation post-floods warranted urgent support and flexibility from the IMF; as it demonstrated in the case of Ukraine when the Fund hurriedly approved the second emergency financing support in October 2022 even without assessment of debt sustainability — a precondition for all Fund financing arrangements — and medium-term macro framework.

This, however, was not the case with Pakistan, which was grappling with the havoc caused by the floods affecting 33 million people. The Fund delayed the review mission to Pakistan, even in the post-floods environment, on the pretext that they needed to see the authorities’ changed policy priorities, particularly the fiscal position.

When Pakistani authorities met all the IMF conditions beyond what was originally expected for the completion of ninth review, the IMF untenably asked Pakistan to arrange for the financing assurances to meet the full external financing needs. The stringency demonstrated by the IMF, even in a situation accentuated by natural disaster, goes to show the extent of the confidence crisis.

Nonetheless, it is important to recognise that under the IMF’s governance framework, its staff, management, and the Executive Board enjoy much independence in their analytical work and do not interfere in each other’s domain for decision-making.

Though the IMF is occasionally criticised for lack of even-handedness, the Fund staff, management and Board are generally responsive to the integrated policy framework and organisational policies and tend to show flexibility in response to rational arguments to support any missed programme performance criteria or indicative target.

When a country is facing a severe balance-of-payments crisis, the onus is on it to put its house in order. Therefore, the best course of action is to implement the agreed policies and actions, rather than portraying them as the IMF’s ‘dictates’ or ‘demands’ or ‘a fait accompli’ to absolve oneself of the responsibility for the economic woes or missteps. Not doing so would send a strong signal that the authorities do not own the economic reforms package.

Going forward, the mistakes committed during the 2019-2023 EFF programme must be avoided. We must adhere to policy commitments and the programme conditionality as formally agreed by the authorities with IMF and enunciated in the IMF staff reports and try to resolve any implementation issues with research and analysis and citing examples of flexibility from other Fund arrangements.

Delaying the implementation of adjustment policies is not just costly in economic terms, it also erodes the trust of the IMF staff, management and Board, which makes it harder to convince the Fund even on an otherwise plausible missed action or target. We must avoid occurrence of such happenings in any future Fund programme.

At the same time, it is crucial to build the capacity of our economic team negotiating the next extended financing arrangement under the EFF to agree on sound economic policies suited to our own country context.

The policy team needs to be competent, well versed in international financial architecture and knowledge of other country programmes to effectively engage in policy discussions.

It is critical to rebuild trust and credibility with the IMF for a more productive engagement and improved economic management aimed at increasing the country’s macroeconomic resilience and external sustainability in the future programme.

Once we enter an IMF programme, the engagement with the Fund should be seen as a partnership rather than portrayed as a monster responsible for the hardships of the people. We must realise that people are suffering not because of the IMF programme but due to the ailment caused by perpetually misaligned policies and inefficiencies of the public institutions.

The writer is a former senior IMF adviser. He represented Pakistan on the IMF Executive Board from January 2020 to January 2023 and has a PhD degree in economics from the University of Cambridge.

Published in Dawn, July 21st, 2023



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