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The IMF’s visit

January 29, 2013

THE IMF mission that was in Islamabad ostensibly to discuss the contours of the next programme has gone back to Washington.

This scribe has been struggling to understand why they visited these shores to ‘negotiate’ a possible programme with a government in its dying days, at a time when Mr Tahirul Qadri was making his own contribution to an already chaotic political situation.

It is simply astounding that in this day and age when all relevant data is easily accessible, available online, or can be transmitted electronically in real time the Fund would send a seven-member mission for two weeks to meet the same officials three times a day.

With elections around the corner the most charitable explanation of their trip this time around and their public announcement that they could be back in February is that they are improving their personal careers and benefits without those designing the programme being liable for the risk of failure.

What is even more disconcerting, however, was that, as usual, much of the ‘negotiation’ process centred around the reduction of the ‘size’ of the budget deficit, by whatever means, with hardly any discussion on the structural issues that have been our bane and which underlie these large fiscal deficits.

The focus continued to be on the production of numbers using excel worksheets for meeting a single objective: achieving a lower, ‘acceptable’ deficit. This obsession has meant that all other policies have become hostage to the fabrication of an artificial number that would please markets and donors, forcing one to conclude that the Fund has learnt little from decades of engagement with Pakistan. This engagement should have taught it how adept we are at playing the numbers game.

The Fund seems quite happy to believe the numbers for revenues and expenditures that have, at best, modest credibility.

Just for illustration take the following cases: the subsidies for fertiliser, wheat and sugar not accounted so far as expenditure in the federal and provincial budgets exceed Rs100 billion; the losses of PIA, Steel Mills and Railways not recognised in the federal budget has crossed Rs350bn; the annual deficits for electricity provision is still not being charged as expenditure, and, building up at an astounding Rs1 million a minute, is more than Rs100bn.

The tragedy is that the Fund has done no real long-term thinking on how to fix our problems, being continuously distracted by its obsession with numbers, nor will it let us develop ours or give us time.

It has lived with this asymmetry for far too long so that all programme failures are sold as our own, while any success is marketed as that of the Fund. The question is: do programmes fail because of lack of implementation or because of poor programme design?

In my view, as in the case of the programme crafted in 2008, the collapse this time around will again be because of programme design. Why is the Fund keen to sign a programme and not the government, thus giving an option to the current set-up to sign a programme and pass failure on to the next government, the ultimate moral hazard?

In its eagerness to design a fresh programme the Fund, yet again, is not letting us come to the realisation that we have a crisis, as we could be confronted with acute pressures on the balance-of-payments position and the rupee by the second quarter of 2013.

Can the Fund, for once, let us face the consequences of our actions or inactions? Sadly, we are just as badly prepared as ever and have not been able to use this opportunity to design our own programme.

It is, therefore, time we all stop repeating past mistakes by concentrating on the magnitude of the fiscal deficit, which is essentially based on phony and fictitious numbers.

What is missing in the Fund’s ‘demands’ is the need for long overdue structural reforms which, as a minimum, should include:

— the discontinuation of commodity financing by the government (its purchases of wheat, fertiliser, sugar etc to subsidise influential interest groups) — privatisation of state-owned enterprises

— energy sector reforms (by insisting on the deregulation of the sector) — elimination of the SRO regime

— a fundamental review of the policy framework which is presently producing inadequate growth because it is diverting investment and entrepreneurial energies into unproductive rent-seeking activities. This is creating powerful lobbies fattened on rents earned from protected and sheltered markets.

The strategy of successive governments has been to extract rents for our geo-strategic location and, regrettably, it has paid off each time, enabling us to continually postpone much-needed fundamental reforms. So, while there was a lot of bluster and lecturing at the press conference that the mission organised before its departure I suspect that it could soon be eating its own words.

This writer has argued in these columns before that, contrary to conventional wisdom, one would not be surprised if the Fund, succumbing to US pressure, eventually drafts a relatively soft programme for Pakistan.

If we cooperate and play ball by facilitating their safe and early exit from Afghanistan the Americans should be able to persuade the European members of the IMF board (who may get, in return, softened terms for Greece, etc.) to forge less stringent conditions for the new programme, although we would not get more than $5bn against the $8bn we would be repaying the IMF.

The writer is a former governor of the State Bank of Pakistan.