Negotiating with the lender: Islamabad mulls new IMF strategy sans US support

Confusion prevails over purpose and timing of the next IMF visit.

ISLAMABAD:

As hopes of a revival of the suspended IMF bailout programme dim following withdrawal of US support, economic managers in the capital question when, not if, a second, possibly more stringent bailout programme should be sought from the lender.

Meanwhile, confusion persists over the timing and purpose of the IMF team’s upcoming visit to Islamabad.

Authorities have been unable to work out the modalities of the team’s upcoming visit, given the ‘miserable fiscal performance’ during the last financial year, said finance ministry sources.

Poor performance, no support

Due to the government’s failure in meeting the budget deficit and revenue targets and inability to reform the energy sector, there are extremely slim chances that the IMF would restore the suspended programme and send a review mission, a prerequisite to receiving the next $1.7 billion loan tranche, sources said.

During the last fiscal year, the overall budget deficit – gap between income and spending – stood at 6.5 per cent of GDP, or Rs1,174 billion, against a revised target of 4.7 per cent of GDP.

Tax collection, meanwhile, stood at Rs1,550 billion against a thrice-revised target of Rs1,588 billion.

Unlike previously, Pakistan does not enjoy support of the United States this time around when all economic indicators, except the current account, have deteriorated.

Sources said the US had informed Islamabad in April that “it needs to satisfy the IMF.” The message was delivered by the then-senior economic adviser to President Obama, David Lipton, who has recently been appointed first deputy managing director of the IMF.

Status and timing of next mission

The status and the timing of the next IMF mission are also contentious.

Key policymakers do not want a mission without having a mandate of ‘fifth economic review.’ The last review was held in May 2010 following which, the programme was suspended.

Sources say there are finance ministry officials lobbying for an IMF visit, irrespective of its mandate, but such an assessment mission in March last year made things rather difficult for Pakistan.

Besides, whether the mission should come before expiry of the suspended programme on September 30 is also a divisive issue.

IMF’s country representative Paul Ross is scheduled to hold a meeting with Finance Minster Dr Abdul Hafeez Shaikh on Monday.

Sources said there are expectations that the fate of the upcoming visit would be decided by the end of next week. They added that hopes of revival of the suspended programme have been quashed.

Second programme

There are also divergent views on when to formally enter into negotiations for a second IMF bailout programme.

Those who support seeking a second programme after the next general elections say that Pakistan needs to consolidate its position before doing so.

They foresee a tough second programme with pre-conditions including sale of loss-making entities and downsizing of employees in state-owned enterprises.

They argue that a new political set-up should hold talks with the lender as there may be issues of credibility and ownership with the present political setup negotiating a new loan.

There are also concerns of sustainability of government’s revenue generation measures.

“Most of the actions taken by the government had a one-off impact, like the flood tax,” said a source. “What the IMF now seeks is sustainable adjustments that would not only ensure economic sustainability but also ensure timely return of the fund’s loan.”

Policymakers need to have ‘vulnerability analyses’ before requesting for another mission visit or going for a second programme, sources said.

Meanwhile, temporary stability in the external financial position provides breathing space to poli-cymakers before holding talks with the IMF for a second programme, sources said.

The current account surplus, a relatively stable rupee against the dollar and over $18 billion in reserves will help keep the pressure off even if Pakistan delays talks for a second programme, they added.

Published in The Express Tribune, July 31st,  2011.