Ailing economy: IMF censures Pakistan over ‘retarding reforms’

The fund says in programme note that Islamabad has lost reforms path.

ISLAMABAD:

The International Monetary Fund says that Pakistan has lost the reforms path and the gains made during first two years of the government have been reversed due to ‘retarding reforms’ - an unprecedented comment highlighting growing frustration of the IMF with Islamabad.

The IMF issued on Tuesday a Programme Note as Finance Minister Dr Abdul Hafeez Shaikh landed in Washington where he will participate in IMF meetings and discuss contours of a new programme.

The statement is likely to build pressure on the Pakistani delegation ahead of negotiations for the second IMF programme which Islamabad is seeking to retire the loans obtained under the $11.3 billion standby arrangement. The statement also comes hardly a week after the White House report on Pakistan.

“The Programme Note could have been a lot harsher. It is very fair and correct assessment of Pakistan’s performance,” said Dr Ehtisham Ahmad, Pakistan’s former representative in the IMF while talking to The Express Tribune from Washington. He said this IMF programme is the easiest in the country’s history and the next one could be the toughest with many strings attached.

“It is an unprecedentedly harsh statement which shows the IMF intentions regarding the toughest conditions it may impose on Pakistan for the second loan programme,” said a finance ministry official who deals with the IMF.

In the Programme Note, the IMF said “structural reforms had moved forward in late 2008 and 2009, but have been retarded or reversed in 2010 and 2011”. In this period, it said, steps were taken to strengthen bank supervision, bolster the social safety net, reform petroleum pricing and taxation, and liberalise the foreign exchange market.

“The note is very damaging not only for the government but also for the economic team, suggesting the IMF is not at all satisfied with Pakistan’s performance,” said Dr Ashfaque Hasan Khan, former economic adviser to the finance ministry. He said the IMF programme note was consistent with the White House report on Pakistan, indicating that the major players are not happy with Pakistan.

The IMF advised Pakistan to strengthen public finances and improve financial intermediation, and to raise economic confidence to stimulate higher savings, investment, growth and employment. Moreover, stronger public finances are needed to allow for higher spending on development and poverty reduction, and to increase much-needed social outlays over the medium-term

It said the economic reforms would also help mobilise financial support from external donors and spur greater private capital inflows.

The IMF staff has recently concluded a visit to Islamabad to explore ways for restoring the suspended bailout programme.

Since May the IMF has suspended the programme due to Pakistan’s failure to implement the reformed general sales tax (RGST). Another finance ministry official said that the last IMF staff-level visit left some bitter stories behind. He said that things got testy between Adnan Mazari, Assistant Director for Central Asia and the Middle East and Finance Secretary Dr Waqar Masood.

The IMF programme note said some progress has also been made recently in modifying the existing GST by reducing exemptions and strengthening the refund mechanism. “However, this reform has been delayed and its scope has been far narrower than earlier envisaged.” Moreover, very little progress has been made in reforms in the electricity sector and commodity operations, which are urgently needed to eliminate financial losses that impose a burden on public finances and pose a threat to macroeconomic stability.

The IMF said legislation needed to strengthen bank supervision and central bank autonomy has not yet been enacted, strengthening of the social safety net is still not complete, and the reform of petroleum pricing has been partially reversed in recent months.

It said adverse security developments continue to hurt domestic and foreign investors’ confidence, while electricity shortages continue to prevent the economy from achieving its potential.

Pakistan’s economy had initially made progress toward stabilisation under the programme. Macro-economic imbalances shrank and inflation fell below 10 per cent in mid-2009. “More recently the budget deficit has increased … and inflation has been on the rise, recording 13 per cent in March 2011.

The IMF said the fiscal policy has been affected by low economic activity and a difficult security environment. Raising budget revenues has been difficult, and efforts have been made to maintain fiscal discipline by eliminating non-priority spending while accommodating additional large security spending.

These efforts proved initially successful, but since June 2009, the authorities have exceeded the budget deficit targets under the programme, among others, due to large additional subsidies for the electricity sector.

Published in The Express Tribune, April 13^th, 2011.