‘We don’t need the IMF... but we might next year’
Pakistan has decided not to seek fresh loans from the IMF for the coming year, though it plans on keeping engaged with the IMF, in case the government’s projections of relative economic and fiscal stability turn out to be inaccurate, senior finance ministry officials said on Friday.
Not seeking an IMF programme in 2011 leaves the government the option of seeking a bailout in 2012, when it is most likely to run into trouble due to the populist, yet unaffordable promises, that most elected governments tend to make in election years.
In a background briefing on negotiations with IMF, senior finance ministry officials that the government had made the decision not to pursue another IMF programme based on an analysis jointly conducted by the finance ministry, the State Bank of Pakistan and the Planning Commission.
The analysis concluded that Pakistan’s current external position is secure enough to not require another IMF bailout after the Washington-based lender suspended the last one.
According to the government analysis, the government will need to pay $1.2 billion back to the IMF in 2012, a payment that government officials feel the nation’s finances can handle, given the current cushion of just under $18 billion in foreign exchange reserves. A worst case scenario would see those reserves depleted by $2 billion, said officials familiar with the document.
“There are risks, but we feel that we can handle them,” said one senior finance ministry official.
The government’s analysis, however, is based on some questionable assumptions. For instance, the finance ministry estimates that remittances from expatriate Pakistanis – currently at record-high levels – will continue to flow in at the same rate.
This assumption is key in leading the government to conclude that the current account deficit – the gap between the nation’s external payments and receipts – will not exceed 2% of the total size of the economy.
Finance ministry officials claimed that the IMF was comfortable with the government’s decision not to revive or extend the current bailout programme, set to expire by September 30.
“The IMF feels that Pakistan has done reasonably good job but could not deliver on some major reforms despite making commitments,” said a senior official.
Yet for all the confidence in Islamabad’s ability to manage its own finances, officials in the finance ministry said that the government is likely to keep engaged with the IMF for the next several years and may even need a fresh loan over the next two years.
Pakistan would remain engaged with the IMF through what are known as ‘article IV’ consultations. Pakistan and the IMF have agreed to hold those consultations in October.
Finance Minister Abdul Hafeez Shaikh admitted that not seeking a fresh loan programme from the IMF would adversely affect the country’s relationship with the Asian Development Bank and the World Bank. “The ADB and the World Bank may not restore their budgetary support loans. But this is not new. Pakistan has learnt to manage the situation without external financial assistance.”
Power sector reforms?
Yet neither the minister, nor finance ministry officials, appeared to have a clear plan for how the government would introduce the necessary reforms in the power sector, the single biggest reason for why Islamabad missed its budget deficit target in fiscal year 2011.
Finance ministry officials admit that the problem of inter-corporate circular debt – liabilities accrued in the energy sector because of the government’s failure to pay its promised subsidies – was much bigger than they thought, putting the figure at close to Rs300 billion.
The finance ministry is expected to present recommendations for the special cabinet committee on energy after Shaikh returns from attending the annual IMF-World Bank meetings in Washington in the third week of September.
Published in The Express Tribune, September 17th, 2011.
COMMENTS (17)
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Pakistan already going to PRINT 280 Billion rupees for energy crisis! lol easy way to comprehend into obstacles.
@Meekal Ahmed: AOA, If u have Facebook account, may i request for your Face book ID. Purpose is to share views as professionals. I am just a student of Economics. I am retired commercial Banker , Having worked in five banks as SEVP and last resigned as president of an investmant Bank
Regards
Faqir Ejaz
@Mr. Meekal Ahmed, I agree with you Mr. Ahmed that I should not have claimed to be an (ultimate) expert on IMF. Yet I would draw your attention towards an article of S.Akbar Zaidi published in DAWN with title, “ irrelevant economists”. I also find myself in agreement with Akbar. 64 years of pegging with no meaningful or proportionate progress is enough to shake ourselves out of slavish mentality. IMF and thousands of PhD’s from Harvard to London school of economics are unable to even understand the malaise of economies of most of the rich world. I am not pro or against any country or institution, for I believe bias degrades you whereas objectivity elevates you, however, I tell you Mr. Ahmed economies of US and western Europe, in general, most probably will not be able again to enjoy pre-2008 position in all times to come. Why I say so? I have a strong objective reasoning for that and I will share it with you some other day. Regards,
If we can pay 1.2 billion in loan installments I am sure we have enough to feed our people... stop asking for aid and cough up a few billion to help the people in flood effected areas.
@Dr. Ghulam Murtaza Khuhro:
Dr Sahib, it seems you know nothing about me since you ask me whether I have read IMF reports (and also IEO Reports).
After three decades in government in Islamabad, I spent SIXTEEN YEARS in the IMF and, as part of my job there, read every damn report that I was required to read if that was my assignment in the Office of the Executive Director in which I served as Senior Advisor.
Not only did I have to read the reports, as part of my duties, I had to write our Chair's views on it which was then presented in the meeting of the Executive Board. Sounds easy doesn't it?
Furthermore, over the course of those 17 years, I attended every meeting in Islamabad (or Washington) where the Pakistan authorities interacted with the IMF whether in program negotiations or not. That too was part of my job.
I don't claim to be the ultimate expert on the IMF but neither should you.
Of course they leave out the part where the IMF has already told them that no loans will be forthcoming because Pakistan has failed to deliver on it's prior commitments to implement economic reforms. No wonder no one believes anything the govt has to say.
oh really|
Article IV consultations are normal and a requirement.Nothing new ..and no one is doing anyone any favour.
The problem is Pakistan has majour problems of quite fundamental nature at macroeconomic level. In addition the rate of growth of population which according to some estimates is about 2.7% is a major drag on real economic growth. Inflation of 15% plus is also a major problem. The tax machinery viz FBR is also not functioning as it ought to.
The floods have caused significant loss to cash crop including cotton. Rice exports had contributed $ 2 billion last year---well this year India has allowed export of rice and Indian Rice is $2 cheaper /ton than Pakistan rice. So I foresee shortfall in export targets The fear is Rupee notes will be printed in tripe shift and the country may enter into hyper inflation. There is lack of confidence due to security situation as such Industrial investments are not taking place at the scale that should have happened.
Government should seriously get the whole economic sector in sharp focus and address the issues.
IMF,World Bank, Asian Development Bank and their policies are useless if your government lacks the will to better the financial health of the country but instead looks at these institutions as a source of funding to be plundered.
@Mr. Meekal Ahmed dear Sir,Although, above question from person like you does not seem serious, however, instead of going in detail, I would only submit that do what China has done. China still has more than 3 trillions of foreign currency in its pocket. As regards, article IV consultation, you are right, it is requirement of membership but have you ever met members of team for the purpose and have you ever gone through their reports seriously. IMF must go back and do what its article 1(ii) is telling it to do. We need more investment, and China, Iran and some other countries are more than willing to cater to our needs. For God sake stop being comprador and beggar. This is age of globalization of KRID. Have a nice day.
If there is no external financing, how will the gap be filled? By printing money?
The annual Article IV consultation is a requirement of membership. All countries, especially important countries, have to submit to it. I don't know why we are making it sound like something special.
@Ishtiaer Hussain: Spot on in your assessment. There are very few people who understand the mandate of the IMF and you certainly do. IMF is not only about lending money but also ensuring that sound fiscal policies are in place in the borrower nation. Unfortunately, the media - either due to their ignorance or a hidden agenda, always present the IMF in poor light.
It is most opportune and appropriate decision. Even article IV consultation of IMF is useless, for IMF does not have comprehensive insight of economies of developing countries. Borrowing for budget financing from external lenders in this age is very bad omen and indicator of deep malaise. Borrowing for balance of payment sometimes could be unavoidable. Yet if value-added exports are enhanced , imports are rationalized by avoiding garbage import and remittances are attracted and facilitated, country might not need even such loans usually attached with nonsense strings. Besides, few more things require urgent attention. (1) A country with 20.9 percent of agriculture, that is marginally ahead of obsolescence cannot enjoy other option but to succumb to degraded demands of lenders like IMF. Percentage of agriculture of GDP in developed countries is nowhere more than 5%. (2) More than 40% of our services sector is informal and is employing obsolete processes (3) Manufacturing sector particularly small manufacturing is lagging behind the standard technology and methods even in the emerging world. Besides, we have large population of working age particularly in below 40 segment. We do not have jobs and even available jobs do not remunerate reasonably what to talk of handsome payments. This is age of knowledge and technologically dominated economy. We cannot sell flesh of these people and keep the country going. In USA, Europe and even Japan the most important issue is not growth or sovereign debt, the most threatening challenge is intractable unemployment. Our economists and policy makers, generally, are living in 1930’s. Either they should quit voluntarily or they should be forced to flee but naturally with not only better but forward looking replacements with eyes wide open to changing world scenarios.
Get rid of IMF and loan sharks.
There are so many misperceptions about IMF in Pakistan. IMF is an effective institution created in the aftermath of the Second World War to ensure economic stability in the world and provide lifeline to countries which are on the brink of default in return for the commitments to refrom. For laymen, IMF is like a doctor who prescribes bitter medicines which are painful in the short run to administer but are necessary for the survival of the patient. Our Urdu anchorpersons and columnists would do better by portraying the real picture of this great institution. But truth is the first casuality when our mediapersons are out to serve their own personal agendas.