The IMF op­tion

The Pak Banker - - FRONT PAGE -

Pak­istan's to­tal debt is 82.6 per cent of the GDP. Ac­cord­ing to ex­perts, for up­com­ing debt ser­vic­ing we need an in­jec­tion of $12 bil­lion into the econ­omy. Where­from to get the money? In such a sit­u­a­tion, an IMF loan seems to be the only vi­able op­tion mainly due to its nom­i­nal in­ter­est rates, and goal of long-term in­sti­tu­tional and struc­tural re­forms. But to reap the pro­gramme's long-term ben­e­fits and es­tab­lish cred­i­bil­ity, the gov­ern­ment will need to fol­low through with IMF's re­form agenda, which broadly in­clude rein­ing in cur­rent ex­pen­di­ture and do­mes­tic bor­row­ing, broad­en­ing the tax base, re­struc­tur­ing and of­fload­ing PSEs, in­tro­duc­ing busi­ness cli­mate re­forms along with se­ri­ous leg­isla­tive work.

As pointed out by some econ­o­mists, this was not the case in Septem­ber 2016 when Pak­istan com­pleted its first IMF Ex­tended Fund Fa­cil­ity (EFF) pro­gramme for $6.64bn. The pro­gramme spanned years and was ex­tended in quar­terly tranches of $500 mil­lion, made con­di­tional on meet­ing mu­tu­ally agreed per­for­mance cri­te­ria, struc­tural bench­marks and prior ac­tions in the fi­nan­cial, fis­cal, three power and so­cial sec­tors.The Fund re­viewed Pak­istan's eco­nomic and fi­nan­cial in­di­ca­tors ev­ery quar­ter, and by the end of pro­gramme, the coun­try had achieved much-needed sta­bil­ity: an un­prece­dented in­crease in for­eign ex­change re­serves at $23bn, con­tained fis­cal deficit at 4.5pc, re­duced in­fla­tion at 3pc; tol­er­a­ble cur­rent ac­count deficit around 1.5pc of GDP, and in­creased rev­enue col­lec­tion at 12.4pc of GDP.

Through­out its du­ra­tion, the pro­gramme be­came a moot point with crit­ics de­scrib­ing its con­di­tions as detri­men­tal to Pak­istan's eco­nomic growth. This has cre­ated a mis­per­cep­tion among the gen­eral pub­lic, when in fact the Fund presents a fea­si­ble op­tion for gov­ern­ments to quickly shore up de­plet­ing for­eign ex­change re­serves and ar­rest de­te­ri­o­ra­tion of bal­ance of pay­ments.Prob­lems resur­face when, at the end of the pro­gramme, the pru­dent poli­cies and re­form agen­das are aban­doned, and states re­vert to unchecked ex­pen­di­tures through short- and medium-term loans, con­se­quently lead­ing to re­newed eco­nomic in­sta­bil­ity. Since the pro­gramme, Pak­istan faced a sim­i­lar sit­u­a­tion, with fis­cal and cur­rent ac­count deficits bal­loon­ing within a year, pro­vin­cial sur­pluses go­ing into the red and tax ad­min­is­tra­tion and struc­tural re­forms for­got­ten mid­way. The unchecked eco­nomic spi­ral led to for­eign ex­change re­serves once again hit­ting dan­ger­ously low lev­els (around $10bn), thus tak­ing us back to the IMF.

Even if the IMF is by­passed in favour of other bi- and multi-lat­eral fund­ing sources, the gov­ern­ment should be proac­tive and con­tinue IMFled re­forms by fur­ther amend­ing State Bank and SECP leg­is­la­tion to en­hance their au­ton­omy, so the SBP can for­mu­late an in­de­pen­dent mon­e­tary pol­icy and the SECP can bet­ter reg­u­late and mon­i­tor all en­ti­ties con­duct­ing busi­ness; changes to anti-money laun­der­ing/coun­ter­ing fi­nanc­ing of ter­ror­ism reg­u­la­tions to ar­rest the in­ci­dences of such crimes; ex­tend FBR's au­thor­ity and ju­ris­dic­tion for ef­fi­cient tax ad­min­is­tra­tion; en­force a medium-term debt man­age­ment strat­egy to ra­tio­nalise re­liance on medium-term loans; im­ple­ment a pub­lic-pri­vate part­ner­ship frame­work to syn­er­gise with the pri­vate sec­tor for ef­fi­cient man­age­ment and fi­nanc­ing of in­fra­struc­ture and de­vel­op­ment projects.

The gov­ern­ment should also de­velop a strong pol­icy frame­work con­sol­i­dat­ing the cur­rent gains and fu­ture po­ten­tial of CPEC projects. If fully cap­i­talised and in­te­grated into in­sti­tu­tional re­forms, the projects can re­sult in real, sus­tain­able, ex­port-led growth shift­ing the to­tal pro­duc­tiv­ity fac­tor curve out­wards for Pak­istan. But reap­ing long-term gains from these will even­tu­ally rest on out­pac­ing the even­tual amor­ti­sa­tion and debt ser­vic­ing via sec­toral growth and com­pet­i­tive ex­ports.

How­ever, re­vert­ing to the Fund for an im­me­di­ate bailout should not be writ­ten off, as the loan con­di­tions can pro­vide the much needed im­pe­tus to re­place Pak­istan's ex­ist­ing anachro­nis­tic sys­tems. Turkey's widely hailed eco­nomic turn­around of the early 2000s was achieved on the back of a sim­i­lar IMF-led pro­gramme. In fact, it is in our na­tional in­ter­est to con­tinue with the re­form agenda of the EFF pro­gramme in the fis­cal and struc­tural sec­tors for long-term growth and sys­temic im­prove­ments.

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