Confusing signals

Pakistan and International Monetary Fund (IMF) are narrowing down their differences for evolving consensus on the memorandum of economic and financial policies (MEFP) that could pave the way for securing a fresh bailout package from lender of the last resort.

However, finalisation of a deal requires more parleys on policy front that might take couple of months more to accomplish the process of reaching the stage of approvals from the Fund’s board.

The agreement on MEFP will lead towards signing of Letter of Intent (LoI) by Minister of Finance Asad Umar and Governor SBP Tariq Bajwa for forwarding formal request to the IMF’s executive board on behalf of Pakistan for approving a possible bailout package to avert balance of payment crisis over the medium term period of three years.

It’s difficult to understand the strategy of Pakistan Tehreek-e-Insaf- (PTI) led government as to how they want to move ahead on this front because they are making all kinds of plans secretly but so far they are giving out confusing signals to markets.

There could be one justification for giving confusing signals as they might want to use it as part of their tactics or strategy to negotiate a good deal with the IMF.

But uncertainty itself takes a toll on the economy and prolonged delays might manifold the difficulties for Pakistan as well as for finance minister to manage sequencing of reaching an agreement with the IMF staff and then use all diplomatic channels to win support of important capitals of the world present into the Executive Board of the Fund for securing good package for Pakistan’s struggling economy.

In Pakistan, the economists were divided into categories as one side considered the IMF package as a prerequisite for moving towards fixing all economic ills, manly because they are fully convinced that self-discipline could hardly be put in place keeping in view governance and political structure of the country.

However, there are few economists who argued expressing apprehensions that the IMF program would be dictated by the USA and there was a possibility of some noneconomic conditions so Pakistan must avoid seeking the IMF program this time.

Those, who are in favour of the program, have taken stance that if the IMF folded some noneconomic conditions then Islamabad could refuse to budge before any pressure anytime, but there was no rationale to avoid seeking help of an institution, which was meant to provide help to all those member countries facing balance of payment crisis under its charter and mandate. Instead of following the path on the basis of apprehension, the IMF help must be sought to avert balance of payment crisis.

At a time when the bilateral creditors including Kingdom of Saudi Arabia, the UAE, and China have already conveyed to Islamabad that any of their financial assistance should not be considered as a “substitute” to the IMF’s bailout and it rather be treated as supplement to the Fund program.

With this crystal clear message, now there has been no justification to delay the IMF program and the political leadership must do away with giving out confusing statements on it as it might become a stumbling block in the way of approval of the package.

Ministry of finance has prepared “Pakistan Economic Stabilisation and Growth Framework” and it would be shared with the IMF staff this week. The possibilities of evolving consensus based on this document might become possible next month but the approval of the program might take some more time. Keeping in view the possible arrangement, the IMF program cannot be approved before March 2019.

Pakistan and the IMF were unanimous that overvaluation of rupee against dollar in the context of ‘stable exchange rate’ played havoc with Pakistan’s economy whereby foreign currency reserves had nosedived sharply in the aftermath of completion of last Fund program in November 2016.

The policy of overprotection of exchange rate pursued by the Pakistan Muslim League-Nawaz (PML-N) led regime for several months paved the way for forcing the State Bank of Pakistan (SBP) to intervene into market for keeping exchange rate stable and this kind of continuous operation had resulted in the evaporation of a buildup of a buffer of foreign exchange reserves after completion of the IMF program in October/November 2016.

The policy of tackling the monster of circular debt was also reversed in the aftermath of the completion of the Fund program as it stood at just around Rs350 billion which had now peaked to over Rs1.2 trillion. The reversal of policies on many fronts is the main cause of existing quagmire, which Pakistan’s economy has been witnessing currently.

Pakistan placed flexible exchange rate instead of keeping it artificially ‘stable’ as it had caused heavy losses in terms of depletion of foreign currency reserves at a time when there was no exogenous shocks for the economy both at domestic and international levels.

The flexible exchange rate should be determined on the basis of demand and supply. Pakistan had pursued flawed exchange rate policy that eroded foreign currency reserves in the range of over $11 billion in last one and half year period.

Under the last IMF program that ended in November 2016, Pakistan had built up its foreign currency reserves and at one point of time it had touched $25 billion mark which had declined in last two years.

The IMF team did raise questions to ascertain facts that what has gone wrong with Pakistan’s economy after completion of the last program by end of 2016 when the oil prices in international market remained on lower side and the security situation in all parts of the country significantly improved. Without having any shocks on international and domestic fronts why the country’s economy nosedived within short span of time was the question raised by the IMF team.

Then there was consensus between both sides that flawed exchange rate policies and reversal of key policies wrecked the economy, paring all the hard-earned macroeconomic gains. The loose fiscal policy had mounted pressure on the external front of the economy as well but the overvalued exchange rate proved disastrous for the economy of the country.

On circular debt, the IMF assessed that the strategy to tackle this menace lost its steam, resulting in piling up this monster again.

Now Pakistan will have to undertake a comprehensive package including rationalisation of tariff, plugging leakages, allowing NEPRA to notify and implement determined tariff automatically and improve governance structure to overcome the woes of cash-bleeding power sector.

There are differences on pace of adjustments on the fronts of twin deficits as Pakistan faced the highest ever budget deficit and current account deficit in absolute terms, so the government will have to undertake massive adjustments to fix the economic difficulties.

The path ahead is not easy for the PTI-led government at least for next two to three years. They must devise a roadmap and stick to it to steer the country out of crisis, but if they continue giving confusing signals then the economic difficulties are bound to multiply in months and years ahead.

The writer is a staff member