Thursday July 07, 2022

IMF and the new team

May 30, 2019

Since assuming office last August, the government had been dithering on a decision to go the IMF despite calls and advice from various quarters to enter into an IMF programme immediately.

The reason the government repeatedly gave for the delay was that it wanted to ideally avoid the IMF altogether or at least wait till it could negotiate with the IMF from a position of strength in order to avoid harsh terms. Ironically, since last August, the government has actually implemented a lot of the harsh measures which it claimed it was trying to avoid – energy price increases, devaluation, policy rate hikes. The government’s indecision on the IMF created a state of limbo for businesses, investors and creditors alike. The IMF question hung like a dark cloud over the economy for most of the current fiscal year which played a key role in the significant slowdown of economic activity.

Nine months later, an IMF programme has finally been agreed. However, the government has actually negotiated with the IMF from a considerably weaker position compared to last August. During the PTI’s tenure so far, growth has halved, inflation has nearly doubled and the fiscal deficit at the close of this fiscal year is expected to be higher than in any year under the previous government.

Even the State Bank’s foreign exchange reserves are actually lower now ($8 billion on May 17) than when the PTI came to power ($9.8 billion in August, 2018) despite significant amounts borrowed by the current government from friendly countries. The current government’s economic mismanagement and inability to make timely decisions has caused a foreign exchange liquidity challenge to turn into an economic crisis. So much for waiting nine months to negotiate from a position of strength.

Then there’s the perplexing matter of the drastic changes to the economic team during the final stages of negotiations with the IMF. As the head and poster boy of the PTI’s economic team, Asad Umar had been under growing pressure since the turn of the new year due to worsening economic conditions. But even his strongest critics were confounded by the timing of his removal. If a decision to remove him had already been made, it should have been implemented either before his visit to Washington (where he met the IMF regarding the bailout package and attended the IMF-World Bank Spring Meetings) or after the finalization of the IMF programme and the budget. To remove him right after his return from Washington DC and just before the IMF staff mission’s visit to Islamabad for final negotiations defied logic.

As it happened, the final round of negotiations were headed by the current advisor to the PM on finance, who had only been a few days into his new role when the IMF staff mission landed in Islamabad. If that wasn’t bad enough, the government decided to replace the governor of the State Bank and the chairman of the FBR right in the middle of the final negotiations with the IMF in Islamabad. Such hasty and ill-timed removals and appointments, coupled with the rapid deterioration of the economic indicators over the past nine months, further weakened the government’s negotiating position and resulted in a seemingly sub-optimal IMF agreement for Pakistan. Add it all up and it only seems natural to conclude that Pakistan would have been significantly better off entering an IMF programme back in August rather than now.

Since the government is refusing to be forthcoming regarding the terms of the programme, all we have to go with so far is a press release from the IMF. More details will emerge when the government presents the budget and, subsequently, once the IMF releases the detailed report after approval by its executive board. One of the main things in the press release is a commitment that the government’s budget for the forthcoming fiscal year will aim for a primary deficit of 0.6 percent of GDP. In order to achieve that, the government will have to increase tax revenues by at least Rs1 trillion, which would be an around 25 percent increase from the tax revenue figure expected at the close of the current financial year. How the government plans to achieve that with even slower GDP growth expected next year, and in light of the expected record tax target miss this year, is anyone’s guess.

The mention of “continuing anti-money laundering and combating the financing of terrorism efforts” in the press release has also raised a few alarm bells. There are concerns that the agreement may contain benchmarks linked to Pakistan’s progress in the FATF reviews – which would be unprecedented.

The agreement has failed so far to bring the hoped-for certainty and stability to the markets. The IMF press release indicates a commitment for a “market-determined exchange rate” which seems to have been the primary cause behind the rupee’s steep depreciation of 10 rupees against the dollar in just nine days after the issuance of the press release. Even the announcement that the prime minister had formed a body to control the rupee devaluation did nothing to stem the rupee’s decline. There have been various reports of dollar shortages in the open market. The announcement of a market-determined exchange rate has given rise to the fear of further fall of the rupee, which has caused a race to hoard dollars. If the government fails to deal with this situation and regain the confidence of the markets, there is a real risk of a full-blown self-fulfilling currency crisis.

The finance advisor flew over to Karachi to hold meetings with businessmen, traders and stockbrokers in order to allay concerns but it didn’t go to plan. While speaking to the media in Karachi, he made it a point to forcefully emphasise that the IMF had not talked about the NFC (National Finance Commission) and that it won’t do so in the future either.

The only problem with that is that he was totally factually wrong. The IMF’s press release categorically states: “To improve fiscal management the authorities will engage provincial governments on exploring options to rebalance current arrangements in the context of the forthcoming National Financial Commission”. Mistakes like these will only damage market confidence and further erode the government’s credibility. The KSE-100 dropped 1,550 points in the five days after the issuance of IMF’s press release.

It is now clear that within the first year of government, the PTI’s economic vision, if there ever was one, has collapsed. Plan A has failed and the management of the economy has been handed to a team of technocrats – some new, some old – for damage control. So far it doesn’t seem to be working. The previous PML-N government had managed to complete all 12 steps of the IMF programme whilst consistently increasing the growth rate, controlling inflation and raising development spending. Imran Khan needs his new economic team to achieve the same.

Sacking his star man was an admission of failure, and replacing him with Hafeez Sheikh is a big political gamble. Having previously been a member of both Musharraf and Zardari’s governments, Hafeez Sheikh is hardly Mr Naya Pakistan. Be that as it may, Imran Khan’s success or failure now hinges upon the performance of Hafeez Sheikh. Who would’ve thought that a year ago? Certainly not the PTI.

The writer is a former consultant at the Ministry of Finance.


Twitter: @BilalAKayani