The more things change…

Challenges facing the economy and their proposed solutions are persistent

The more things change…


ver wonder what is common among the governments of Gen Ayub Khan, Zulfikar Ali Bhutto, Gen Zia-ul Haq, Benazir Bhutto, Nawaz Sharif, Gen Pervez Musharraf, Shaukat Aziz, Asif Zardari, Imran Khan and Shahbaz Sharif? They may have difference of opinion with their predecessors or successors but they all agreed to borrow from the International Monetary Fund. Since 1958, Pakistan has borrowed from the IMF 23 times, and this is undoubtedly not its last programme.

Pakistan’s first loan from the IMF was meant to provide economic stability to the country after the military coup of 1958. The second one was to stabilise the economy after the 1965 war with India. The third one aimed to support Pakistan’s efforts to achieve economic development and reduce poverty. And then came a salvo of loans mainly in the name of economic reforms, structural adjustments, fiscal and monetary policy reforms, privatisation, trade liberalisation and to avert a balance of payment crisis.

In IMF language, a letter of intent (LOI) is a formal missive that a government dispatches to the Fund to provide a comprehensive assessment of the economic challenges that the nation is facing and the policies that it intends to implement to redress those issues through an IMF loan. Typically, this letter is written jointly by the country’s finance minister and the central bank governor. It is accompanied by two other documents, namely (a prior agreed) Memorandum of Economic and Financial Policies (MEFP) and the Technical Memorandum of Understanding. The supplementary documents furnish intricate details about the government’s policies and reform agenda. Once in a loan programme, a commitment to keep on delivering on an ongoing programme is revived at the time of each review for releasing a loan tranche.

To ensure transparency, the IMF requires that governments authorise publication of these documents on its website. The LOIs submitted by successive governments of Pakistan proffer significant insights into the state of economy and the terms and conditions agreed upon to access respective IMF loan programmes. These undertakings provide a more profound understanding of the pitfalls of previous efforts. Recalling them may help bring some sanity to an otherwise politically heated debate around the IMF and its loans.

What can one learn from the LOIs? Pakistan has been borrowing from the IMF owing to a lack of fiscal prudence, lack of ability for revenue mobilisation, doling out non-targeted subsidies and tax exemptions to please the constituencies and interest groups, blackholes in economy in the form of ailing state-owned enterprises and intercorporate circular debts, chronic trade imbalance, and current account deficit leading to a balance of payments crisis. The challenges facing Pakistan’s economy and their proposed solutions are so persistent that in some cases all one needs is to change the date and year on an LOI written by the previous government.

An Argentinian joke goes: if you leave Argentina for twenty days, everything changes; come back in 20 years, and everything seems the same. This also holds true for Pakistan’s volatile political situation and deeply entrenched economic problems.

Let me explain through the recent LOIs submitted by the PTI, PML-N and PPP governments.

In 2008, after the restoration of democracy, the PPP and PML-N found Pakistan’s economy mired by the politically popular decisions of Shaukat Aziz. A consumption spree supported by an accommodative monetary policy (low-interest rate) had led to a current account deficit while massively subsidising energy (in the run-up to elections) was the beginning of the accumulation of energy circular debt. A judicial stay order to privatise the Pakistan Steel Mills had tainted the privatisation process in Pakistan.

The more things change…

The cure lies in non-populist reforms that many politicians dare not enact under normal circumstances. Such reforms are often only feasible if the government is “coerced” by the IMF.

The PPP government in November 2008, through its LOI, promised fiscal consolidation, tightening of monetary policy, reduction of fiscal deficit to 4.2 percent of the GDP from 7.4 percent, reduction of current account deficit, elimination of intercorporate circular debt, pursuing a flexible exchange rate, increasing GST to 16 percent, eliminating electricity tariff differential subsidies, adjustment of fuel prices to pass through the international prices, eliminating financing of the budget through State Bank of Pakistan, putting in place a social safety net for the protection of vulnerable segments of society (BISP), increasing tax revenue and full implementation of value added tax.

The then opposition parties criticised the government for its ‘anti-public’ economic policies and vowed to break the shackles of IMF once they came into power. Amidst criticism, the PPP government implemented the IMF programme piecemeal. In 2010, Pakistan had a super flood and it was no longer possible for the government to fulfil its commitments to the IMF; resultantly the programme was suspended. The fiscal deficit in the run-up to general elections, current account deficit and energy circular debt rapidly mounted in the absence of an IMF discipline forcing the PML-N to seek a fresh bail-out from the IMF after coming into power in 2013.

“Poor economic management during the previous government and unaddressed long-standing structural problems have led to falling capital inflow and [a] large reduction in international reserves” is the opening sentence of the LOI submitted by the PML-N government to the IMF in 2013. Pakistan again committed to “strengthen macroeconomic and structural policies to shore up confidence and to reduce economic imbalances” through an IMF programme.

The PML-N government adopted some of the promised fiscal adjustment measures through the 2013-14 budget. A certain amount of US dollars was purchased from the spot market to build up State Bank’s foreign exchange reserves. A three-year plan to phase out the energy circular debt through an increase in tariff and reduction of subsidies was shared with the Fund. The government also committed itself to improving tax revenue mobilisation and addressing the issue of the SOEs. Its political opponents criticised the PML-N for ‘toeing’ IMF’s policies. It missed certain commitments and had to seek 16 waivers from the IMF board for not being able to achieve its benchmarks and targets. The 2013-2016 programme was the first IMF programme completed by Pakistan. Once Pakistan came out of the IMF programme, the PML-N government went on a spending spree. This caused a fiscal deficit. On the other hand, consumption-led growth led to a massive current account deficit.

After the 2018 elections, the PTI government found itself in an economic situation similar to 2013. For one year, the PTI government resisted pressure to seek IMF help. However, realising that bilateral funds cannot substitute for the IMF assistance, it had to go for an IMF loan in 2019. Collate the LOIs of the PPP and the PML-N, and you will get the PTI LOI.

The PTI government diagnosed a lack of attention to the implementation of much-needed structural reforms. It proposed an expansion of avenues for domestic revenue mobilisation and resolution of the inefficiencies and losses in SOEs.

To overcome the current account and fiscal deficit, the PTI government also planned to implement stabilisation policies, enduring structural reforms (for strengthening institutions), and expand social safety nets to cushion the impact of the needed stabilisation policies on the poor.

Like PML-N, PTI’s prior actions to show seriousness about reforms included the adoption of the FY 2020 budget consistent with (IMF) programme targets to kick-start fiscal consolidation (read: tax measures and withdrawal of exemptions); adoption of a flexible market-determined exchange rate as a buffer against external shocks; and a tighter monetary policy to shore up confidence and control inflation. It also increased gas and power tariffs to stop the growth of quasi-fiscal deficits (to address the energy circular debt); and expanded social support. The PTI, too, had to swallow the same pill it used to give to the then government when it was in opposition, i.e., staunch criticism from the opposition parties for “pledging national sovereignty” to “anti-poor” IMF.

Facing a no-confidence vote, the PTI government abandoned its commitment to pass on international energy prices to consumers. After some initial reluctance, the PDM government resumed the IMF programme. However, after receiving the last tranche, it resorted to populist measures and is now compelled to take all the actions it should have taken over the previous five months to revive the programme once again.

The letters of intent submitted by successive governments of Pakistan for IMF programmes reveal that all of them were very clear on what was wrong with the economy and how to cure it. The cure lies in non-populist reforms that many politicians dare not enact under normal circumstances. Such reforms are only feasible when the government is “coerced” by the IMF. However, succumbing to opposition pressure, the governments (except PML-N 2013-2016) violated their commitments after receiving the early loan tranches resulting in a suspension of the programme.

All governments profligate before elections, leading to rupee (fiscal) and dollar (current account) deficits. Their successors then have no choice but to approach the IMF with a loan request. All of them blame their predecessors for lack of timely action. None of them assumes total ownership of the IMF programmes.

The three major parties, when in opposition, have all criticised the government for making life challenging for the people of Pakistan under the IMF diktat. The commitments unfulfilled in one programme become “prior actions” for releasing a loan tranche under the following programme. The mandatory prior actions make the IMF programme painful for the people and the government.

The silver lining in the current cloud is that this time the programme will be resumed on the assurance of a continuity of policy and structural reforms. If that happens and we can cure our self-inflicted economic woes, the next programme may be our last IMF programme. For that to happen, our political parties have to show rare maturity.

The writer heads the Sustainable Development Policy Institute. He tweets @abidsuleri

The more things change…