Talks with the IMF

An IMF mission is in town. This is a welcome development, even as its mandate is not clear. Government officials emphatically claim this is neither a programme nor an Article-IV mission, the latter being overdue since last April.

In a TV interview, Finance Minister Asad Umar has indicated that the mission will give an external assessment of the country’s economic situation, which would come in handy should the country decide to seek a programme. He further disclosed that a decision from the available options – Friends or IMF programme – would be taken by the government latest by the second week of October.

An IMF programme is sought when a country faces a balance of payments (BOP) crisis. This happens when foreign exchange is not available to finance BOP deficit. The IMF charter requires it to assist member countries under such circumstances. However, Fund resources are made available only when a country agrees to adopt policies and take actions that would remove the symptoms that gave rise to the problem. There are two parts to a Fund programme: performance criteria (including prior actions), and structural benchmarks. The former deals with macroeconomic stabilisation (such as reducing fiscal deficit) while the latter with critical economic policies (such as energy-sector reforms), which would also have an immediate bearing on stabilisation.

Clearly, this is a very reasonable approach and a country in distress should welcome this prescription. Additionally, IMF support brings the World Bank and the ADB also to provide policy loans that help BOP.

A Fund programme is not a competitor of support from friends. In fact, it would strengthen the country’s negotiating position by partially bridging the financing gap. One may assume some strategic reasons for not going to the Fund. However, it is hard to imagine if such reasons exist. This is not an ideological problem; rather a plain and simple economic question. Of course, the IMF Board may bring in a variety of considerations when taking a decision on Pakistan’s request. However, none would be more paramount than the need to help a member under distress. Furthermore, no one has veto power and nor does anybody enjoy any influence beyond the voting power it carries. Hence, if there would be opposing voices, there would also be those supporting us.

There is also an urgent need to quash the propaganda that Pakistan is shying away from the programme because the IMF would come down hard on CPEC. Nothing could be farther from the truth. The Fund would not have any basis to intervene in matters related to sovereign decisions. More importantly, the Fund has known CPEC from inception; has done its analysis and found it helpful to the economy. It keeps track of the corridor’s progress whenever it engages with Pakistani authorities. However, the IMF stresses the need to build forex buffers to meet probable repatriation liabilities in the future. Not joining the Fund programme would lend credence to baseless allegations on CPEC, thereby undermining its efficacy.

We now turn to a brief assessment of BOP needs and financing. In response to a question in his press conference on September 18, Asad Umar said the external deficit would be $18-21 billion during the year. This assumption should be the starting point to assess the challenge. It means the country will repeat last year’s performance, with a possible addition of $3 billion in deficit. Is this a sustainable proposition? Let’s look at BOP data for the last year.

The $18 billion deficit was financed through $11.7 billion of loans and foreign investments. The loans included $2.5 billion from Euro Bonds and Sukuk bonds and the rest from multilaterals, bilateral, supplier credit, commercial banks and foreign investments. The remaining $6.3 billion were made up by drawing down on the country’s reserves, which declined from $16,243 million to $9,890 million.

Would it be possible to repeat this performance in 2018-19? The answer is in the negative. Even if we succeed in obtaining the same amount of loans, our reserves, presently less than $9 billion, cannot be reduced by another $6.3 billion as it would undermine the confidence of trading partners and foreign investors. By assuming the same level of loans, we have been generous. Effectively, it amounts to having access to friendly support, as our rating is down and markets know our capacity to borrow has diminished.

Given the above, it is untenable to argue that friendly support would work as an alternative to a Fund programme. There is no escape from an IMF programme. No friend will help Pakistan fix its broken fiscal system – taxation and expenditures – its trade and exchange policies, energy-sector distortions, installed privatisation programme, financial and banking-sector inefficiencies and help in removal from the FATF grey-list. It is only the IMF and its partners that can help us do that. The Fund programme is not merely a cheque deposited in the central bank. It’s a complete road-map of how the economy will evolve over the programme period, comprehensively monitored and evaluated every quarter. This is an unparalleled discipline that nobody can bring to bear.

The new government needs such a road-map urgently to send market signals about its seriousness and readiness to take unpleasant and unpopular decisions without which there is no hope of economic correction. A host of exogenous shocks are in the making. A number of emerging economies are confronting an adverse phase of the business cycle, and bracing for more difficult times ahead. In the absence of a Fund programme, the country will be ill-prepared to face those shocks.

The current government has inherited an economy that is in a terrible shape. But deferment and fractional adoption of unpleasant measures will aggravate underlying symptoms. Joining a programme is a pre-commitment to a predictable course of economic management, critically needed at the moment. Doing so early in the term would be far more effective than doing so six months later, as things will further deteriorate and lead to more stringent prescriptions.

The writer is a former finance secretary. Email: waqarmkn@gmail.com