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Opinion

Economic notes

August 14, 2018

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The new IMF programme

Whether Pakistan should seek an IMF programme remains an engaging topic. Recently, some experts have suggested – mostly anticipating the tough conditionality of the programme, the adverse US reaction, a sustained negative focus on CPEC, and its perceived opposition from the IMF – that Pakistan should draw up contingency plans to face the economic situation without the Fund.

In this article, we will explain why Pakistan has reached this junction so soon after successfully completing a Fund programme and why the Fund programme is necessary. We will also explain the IMF’s views on CPEC, and the reactions of the US government and, more recently, US senators on a possible Fund programme to Pakistan.

When the last IMF programme was drawing to a close (September 2016), IMF staff had suggested that Pakistan should seriously consider seeking a new programme to ensure that the nascent gains were consolidated and the possibility of returning to the IMF any time soon was firmly eliminated. Emboldened by the successful completion, and fatigued by a three-year long scheme, Pakistan politely declined the offer.

Even though it was clear that after the programme the tight discipline would be loosened up a bit, there wasn’t the slightest idea that the floodgates of profligacy would be opened, eroding every gain under the programme. Unfortunately, this is precisely what happened 21 months after the Fund programme.

The economic mess that we find ourselves in isn’t the making of either exogenous external shocks (such as oil prices in 2008) or the premature abandonment of an IMF programme – as we have seen every single time that we have gone to the Fund since 1988. Rather, we came here through a combination of recklessness and indifference to economic imperatives. There is also no parallel of landing in this mess when the real economy has grown uninterruptedly in the last five years (5.8 percent growth being highest in the last 13 years), with relative price stability, general buoyancy in economic activities, and robust consumer spending.

Viewed in this background, Pakistan won’t be approaching the IMF as a forlorn delinquent, but as a country that has faced difficulties essentially on account of poor economic management in the backdrop of an unprecedented political upheaval, general elections and a new government that has been voted into office with high public expectations. There is no reason to believe that the new government will not be engaging in responsible economics. Therefore, it deserves to be helped at a time when the country faces exceptional balance of payments problems.

Section 1(v) of the Articles of Agreement of the IMF reads: “To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with [an] opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity”.

The Fund is the central bank of the entire world. Seeking IMF support is a straightforward, linear path to finding a solution to an economic crisis. There is no alternative method so long as the world operates within the framework of the international financial system evolved after World War II. No country that faces a balance of payments problem, regardless of how it has emerged, looks for other alternatives because there are none. The delay only makes matters worse as the need for adjustment, once felt, keeps magnifying.

Stigmatising IMF assistance for Pakistan is misconceived. If we approach them, it will be the seventh time we will be seeking a major programme (we are not counting individual loans, often combined or leading to a larger programme loan). Pakistan’s track record of repeatedly seeking Fund support pales in comparison to those countries who have spent more than 50 percent of their membership years under a Fund-assisted scheme and have run programmes as long as a couple of decades.

Pakistan is not even in the list of such countries, which include Argentina, Peru, Philippines, Jordan, Romania, Morocco, Algeria and South Korea. Pakistan’s claims on Fund resources have been modest. Only once did Pakistan receive an exceptional support of $11 billion in 2008 (six percent of GDP), which was seven times its quota. Other countries such as Greece, Ireland, Portugal, Turkey and Brazil have received much larger support – sometime as high as 30 times their quota (or 15 percent of GDP). We owe less than three percent of our GDP as the IMF’s outstanding loan.

Regarding conditionality, as we explained in ‘Do we need the IMF?’ published in these pages on July 31, the most daunting condition is to reduce aggregate demand, of which the largest burden will be on the fiscal side, where the deficit in the first year has to be brought down to five percent of GDP from 7.1 percent reported for last year or implicit in the budget presented by the previous government. A fiscal adjustment of at least two percent (Rs800 billion) will be hard, but without it economic instability would persist.

While under the programme, Pakistan has been talking to the IMF about CPEC. A small research was performed on its impact, which was published in one of their staff reports, and updated more recently in Article-IV Consultations Report of July 2017. The IMF has generally recognised the significance of these investments in removing key energy and infrastructure bottlenecks, and the consequent positive effect they have on growth. But it has advised us to build reserves to service repayment obligations. Accordingly, CPEC isn’t new to the Fund, and the IMF won’t be justified in making the project a policy matter for the programme.

With regard to international politics, it should be recognised that the US doesn’t have veto power. Of late, China’s share has increased and is almost close to that of Japan, which is number two. The EU as a whole comes next to the US. Pakistan’s executive directors at the IMF and World Bank have to work hard to ensure that non-economic considerations don’t influence the Fund’s decision-making.

Regarding Chinese loans and IMF support, it should be recognised that the net transfers (disbursement minus debt-servicing) from China are positive. Hence, Chinese loans won’t feature in Pakistan’s financing gap that is to be filled with IMF assistance.

The writer is a former finance secretary. Email: [email protected]

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