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Crisis fears mount as IMF talks tough


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-Reuters Photo

KARACHI: Going by the language the International Monetary Fund is using these days, it looks like Pakistan might soon be crying uncle all over again. On the day when the top guns of Pakistan’s economic team, led by the Finance Minister, began their strategic dialogue on finance and economy after an 18-month interruption, the IMF released one of its most strongly worded notes on the state of Pakistan’s economy and the steps required to avert the dangers it is facing.

The note contains some of the harshest language the IMF has ever used in describing Pakistan’s economic management, at times even appearing to criticise itself by pointing out that going forward, there is a need for “better analysing the risks to the programme”.

Most people now agree that the growing precariousness of the country’s foreign exchange reserves makes another IMF programme an inevitability, and this is really what the “strategic dialogue” is all about. The IMF has made clear that “strong ownership and securing broad political support” for the required reforms will be critical, a clear indication of the Fund’s reluctance to deal with an interim government as it is unlikely to bring either of these two key ingredients to the table.

As the election calendar unfolds, ownership of economic problems and political support for the tough decisions called for in the policy note are set to weaken. Once an interim government has arrived, the window for a major strategic economic decision will close. The political calendar then sees the conduct of the elections, followed by the start of coalition parleys, followed by the election of a new prime minister. Then comes the formation of the new cabinet, after which the window for a major strategic economic decision will open one more time. By that time we could be well into July.

“I don’t expect an early programme,” says Sakib Sherani, who served as Principal Economic Adviser to the former finance minister and has dealt closely with the IMF in the past. But Mr Sherani adds that should the reserve position see a rapid deterioration, it might force the Fund’s hand.

The fear at the moment is that Pakistan could drift towards a serious economic crisis, driven by critically low foreign exchange reserves, precisely when it is paralysed in the midst of a major historic transfer of power. The best way to avert this is to get onto an IMF programme before the curtain drops on the present dispensation. But the Fund appears to be setting the bar very high for a government famous for its indifference to economic problems. “They will insist on prior actions this time” says Shaukat Tarin, the former finance minister who led the negotiations for the last programme Pakistan signed with the IMF in 2008.

That programme was heavily front-loaded — meaning that a large proportion of the money was released up front, with expectations of policy reform to come later. According to the IMF, implementation of that programme was “initially good, but remained incomplete thereafter”. Translated into plain English, it means that Pakistan took the money and ran.

That memory lies behind the harsh language in the IMF note, and the demand for prior actions before any funds are released.

But what might these prior actions be? The note talks about “short-term revenue and expenditure efforts” like broadening key taxes and ending subsidies.

It also calls for an end to a monetary policy that “has accommodated large fiscal deficits”.

“After the walkout from the last Fund programme, the government has gone ahead with massive tax breaks,” says Dr Hafeez Pasha, a former finance minister. “The IMF is saying ‘please go back to the tax system as it was’.

In addition, the Fund has called for a “more prudent monetary policy”, a “substantial fiscal adjustment” and “more exchange rate flexibility”, meaning devaluation of the rupee.

BANKING ON US: Is this realistic given that the adjustments required as prior actions carry steep political costs? Shaukat Tarin agrees that the political economy is stacked against these “prior actions” and says Pakistan will therefore “lean on the US to ask for lenient treatment”.

“If the IMF wants to move on merit alone, they will ask for prior action, but America has tremendous influence and can change that,” he says. And he should know. Pakistan has reportedly received help twice from its superpower patron in past dealings with the IMF.

Some indications of what the IMF could face in trying to pressure Pakistan came during the outgoing week when the White House said that it “strongly objects to the certification requirements” that Congress sought to place on disbursements from the Coalition Support Funds, saying these requirements come at “a particularly sensitive time” and can put at risk “the success of our campaign in Afghanistan”.

If the White House can tell Congress to back off from pressuring Pakistan, where does that leave the IMF? Perhaps it is with this in mind that the IMF has released a harsh assessment at precisely this time. “This report will make it harder for the IMF executive board to justify lending resources to Pakistan with the status quo,” says Sakib Sherani, who agrees that the demands being laid out are politically unfeasible at the moment.

By tying its own hands early in the negotiations, the IMF may be building a case to tell the US that continued indulgence of Pakistan’s refusal to reform is harmful for everybody’s interests. The IMF may be battling to save its credibility as a financial institution by putting out this note, but the stakes are highest for Pakistan.

A continued erosion of reserves carries severe risks of a spiralling economic crisis in the midst of a political transition. “The lack of a quick resolution on a new programme with the IMF could influence when elections are called in Pakistan,” says Sakib Sherani.

Comments (25) Closed

Bong Dec 03, 2012 06:57am
Seriously, I think friendly nations should help out Pakistan - an imploding Pakistan is to nobody's benefit in the neighborhood.
karim Dec 03, 2012 03:07pm
Pakistani state has become dependent on aid and loans which it believes it can get for free because of its relationship with US, China, Saudi Arabia etc. Its the same attitude that a common Pakistani has these days that he doesn't have to obey rules and regulations if his uncle or cousin is a highly placed government official. These are self-destructive attitudes and the IMF needs to hang tough.
peddarowdy Dec 05, 2012 08:32am
Oh please, just to service a million strong army it would be a drain on the exchequer. The Musharaff Govt hid many aspects of the Military allocation with the civilian. The debt servicing along with Military expenditure, taking into account end to end expenditure, is around 60% of Pakistani Budget. I can show you IMF and WB reports, but the comment would not get approved. The world will say if you can have so many arms, you might as well not beg.
Abdullah Hussain Dec 03, 2012 05:16pm
The President, Prime Minister, Ministers, Advisers are responsible for dragging Pakistan into the ever present financial chaos. Our leaders are too busy in either corruption or accusing each other of wrong governance & follies. It is a matter of shame and disgrace that even Bangladesh, Sri Lanka, Nepal & other non developed countries are economically, politically & governance wise are better placed than Pakistan. Our leaders are only interested in power & money by any & all means. They have no considerations for Pakistan & its condition. Due to their Incompetency the ministers have ruined the ministries under their control. Power, Gas, Water, Railway, Transportation, Education, Health Care, Sports, Police are all under extreme strain. Not a single ministry in Pakistan can showcase itself as doing well with productive output. O GOD please punish the indigenous destroyers of Pakistan. It is a matter of shame that Pakistan which has all the goodies of Nature, Man Power is being systematically made pauper. When will Pakistan stand on its own feet. The corrupts have to go. The peoples have to take necessary action to force the corrupts out.
Jamil Dec 04, 2012 02:45pm
Bring back Musharraf.
Neo Dec 04, 2012 02:47pm
just saying they have to go, they will not go.. come to the streets and protest.. get a force of a few million like minded citizens and your voices will be heard.... try it... works wonderfully well..
Amir Saeed Dec 03, 2012 07:14pm
Why do we have to go back to the IMF again and again and grovel before the US to keep the loans flowing? Because our rich and our corrupt leaders would not pay their taxes. They would much rather pawn the future of this country's children and leave them in debt, while making this coutry ever-vulnerable to American arm-twisting for following policies that are against our national interest and undermine our independence. These loans allow the corrupt and selfish leadership avoid their responsibility. These loans subsidize their lavish life styles. And they rob the people of their independence, their self-respect, their share of healthcare and education when government spending on these is cut on IMF recommendations, and condemn them to perpetual slavery. Imran Khan is right when he says that these people have sold Pakistanis for dollars. In reality, it means just that.
Raj Dec 03, 2012 12:17pm
You should rely on your own resources and not depend on someone to bail you out. You seem to suggest that the neighbours should help you out. Pakistan should learn to handle the money.
peddarowdy Dec 04, 2012 08:46am
How can Pakistan build costly weapons like Nukes, Missiles, realistically expect others to give it money? You can't stand on your own feet, but want to buy big toys to play with big boys? Big toys belong to big boys!
ROHIT PANDEY Dec 03, 2012 03:52pm
USA is already doing it,would think? And,they don't seem to be liked in Pakistan???
Neo Dec 04, 2012 02:49pm
lol, good one... Bong on target ;)
YA Dec 03, 2012 06:44pm
First Pakistan should figure out how it could bring its population to pay taxes before there is any hope of managing it!!!!
Ismail Strathmore (@SMBI) Dec 04, 2012 03:40am
Simply what is needed in the Pakistani case is shock therapy, we are not a small country, lacking major resources in the same manner of Jamaica, Bolivia or Greece. What we need is to default, let the government go bankrupt, some will say its preposterous, but it is necessary we should rapidly, move towards privatization of our national assets: railways, energy, airlines, telecommunications and Television. Remove government from economic life, and corruption will automatically subside, even hospitals and schools should be privatized, couple this by devaluing the currency and removing subsidies. I am certain a huge portion of our people were suffer in the short term, however in the long term our prospects will pick up as we have 180 million people that is an economy of scale, we can sufficiently generate economic activity if government is removed from the economic realm. Allowing it to focus on more pressing political issues, for example creating more provinces as this will definitely ease grievances.And above all ending the Baluchistan insurgency : let them have more autonomy, a deal can be brokered, centralization is not the answer.
human Dec 03, 2012 01:52pm
Translated into plain English, it means that Pakistan took the money and ran.... This is the Pakistani style. They take American money in the name of fighting the war on terror and then they supply the terrorism to all over the world.
Bong Dec 03, 2012 06:56am
Time to say thank u uncle TOM for all your largesse and we need some MORE of it.
Akram Dec 05, 2012 03:28pm
If Pakistanis paid their taxes fairly, the state would not need a begging bowl. However the same people who complain that Pakistan should not beg, should ask themselves how much tax have I paid over the last 10 years, and how much should I have paid? We all want someone else to pay the tax, whilst we want our own voice heard. This is why Pakistan is in the current mess.
ROHIT PANDEY Dec 03, 2012 04:03pm
At all times,in all countries,the people at the top kings,queens presidents,prime ministers have been corrupt....and in all probability,will continue for all times to come human beings what they are. One must learn from Japanese who run a tight ,disciplined and productive society about BOTTOMS UP honesty and prudence. It is the way the "ant hill" of any human society can organize itself=sound values ALL AROUND!
peddarowdy Dec 04, 2012 08:44am
If Pakistan can build nukes, missiles and whatnot, why does it need the money? You want the world to fund Pakistan's weapons? Its like an alcoholic pointing the gun to his own head, threatening he will kill himself if he doesn't get his fix of alcohol.
ROHIT PANDEY Dec 03, 2012 09:58am
Simple time tested virtue of honesty would help? Like Pakistanis being honest about paying taxes to fund the cost of running a government!
meekal a ahmed Dec 03, 2012 09:10am
very good Khurram. Will send you an e-mail.
Zishi Dec 03, 2012 12:48pm
This is one of the achievements of our current government. They made sure that they don't leave any cash behind and rob Pakistan as much as they can.
Traveler Dec 03, 2012 10:50pm
Pakistan took the money and ran! To where ? Lol...
abdussamad Dec 05, 2012 06:27am
Nukes and missiles have nothing whatsoever to do with Pakistan's economic troubles. The major portion of the government's budget is spent on subsidising electricity and servicing debt. Our foreign exchange reserves are falling because of high oil import bills and debt repayments. The cost of nukes and missiles isn't even worthy of a footnote in our accounts.
abdussamad Dec 05, 2012 05:05pm
First you talked about the cost of military hardware and now you are talking about the entire defence budget. Those are two separate things. Spending on military hardware is not the cause of Pakistan's economic problems period.
Vaidhya Dec 09, 2012 05:47pm
India should stop funding IMF if the money is ill-spent on countries that are on the brink of failure..The 3+ billion dollars given to IMF could be better spent in poorer countries as well as reforms in India itself.