Back to the IMF
It is in Pakistan’s best interest to continue the Fund’s reform agenda.
By: Aisha Ghumman
AS the new government prepares to address Pakistan’s acute economic challenges, there is wariness towards contracting more loans, as its total debt is already 82.6 per cent of the GDP. However, a prudent approach demands financial leveraging (funding via loans) to optimise available resources. This, coupled with a need for an immediate injection of $12 billion (as per the government’s assessment), require tapping into external resources.
In such a situation, an IMF loan should be considered a 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.
Unfortunately, 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 over three 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, 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.
This stability was in contrast to the criticism the loan had garnered since the Article IV Consultations in 2013. 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, central bank and short-term borrowing once again becoming a go-to solution, 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 IMF-led 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; and eliminate tariff differentials in the power sector to boost overall performance and transparency of institutions.
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.