While forex reserves run low, government undecided on fresh IMF loan

Political implications of another deal weigh heavily on decision makers.

ISLAMABAD:

The government finds itself in a fix as it debates signing on for a new loan programme with the International Monetary Fund (IMF). The country’s economic managers want a deal, while the political leadership is sensitive to the implications of a potentially unpopular decision ahead of the general elections.

Speculations of renewed negotiations for a loan from the IMF were fuelled after the recent meeting of Pakistani authorities with IMF officials in Washington, on the sidelines of a Pakistan-US strategic dialogue. A member of the visiting team told The Express Tribune that the US has assured Pakistan that it will support any move for a new loan programme in the IMF board.

Economic managers, led by Finance Minister Dr Abdul Hafeez Shaikh, speak in favour of the new programme: they say it will ensure predictability and stability during the time the government will transition as part of the election process.



While insisting that the economy is “still manageable” despite difficult conditions, the finance minister has said that the question is how much more exposure the country will take before deciding to go for the loan. He said that it was a matter of deciding while the economy was still on solid ground, or when it was right at the verge of another default.

The United States and international financial institutions are also of the opinion that indecisiveness and uncertainty regarding the economic policy could lead to a further deterioration in economic conditions, particularly on the external front. They concur with the view that an IMF-approved programme will ensure continuity of policies during the transitionary period.

However, discussions with members of the government’s economic team reveal divisions within its ranks, which may delay an official decision on whether or not to go the country will opt for the loan.

Other government officials said the political blowback from entering a fresh loan programme is restraining the government from taking a decision. The IMF programme is not expected to be popular among the masses, and will hurt the vote bank of the ruling Pakistan Peoples Party.



Minister of State for Finance Salim Mandviwalla said that signing on for a new programme will be a political decision, and that no decision has been taken in this regard at any level so far. He also dismissed media reports claiming that an IMF team will visit Pakistan, saying that no such thing will materialise until the government decides to sign a fresh deal.

Mandviwalla also hinted that the incumbent government will not take any decision regarding fresh loans without the consent of other political parties.

Meanwhile, foreign exchange reserves held by the State Bank of Pakistan have already depleted to $8.7 billion, sufficient only for ten weeks’ worth of the country’s import bill. The IMF has warned that the reserves are “below adequate levels”. The rupee has also depreciated to an historical low against the US dollar, and the fiscal deficit is expected to widen beyond official estimates of Rs1.2 trillion.

Pakistan entered into a three-year arrangement with the IMF in 2008 for an $11.3 billion loan. The country had been on the verge of defaulting on international payments. However, the IMF prematurely terminated the programme in 2010, with $3.4 billion still undisbursed, after the government could not demonstrate that it had implemented the energy and taxation reforms promised in return for the money.

The finance ministry says the country has an ongoing dialogue with the IMF, and the recent meetings were aimed at reviewing the economic health of the country. However, there is a wide difference between official and IMF projections for the economy, which indicates that both parties may not be on the same page despite continuing contact.

Published in The Express Tribune, December 14^th, 2012.