Relations with the IMF

In the immediate aftermath of the floods, the International Monetary Fund (IMF) appeared to be very sympathetic and reassured Pakistan that it stands ready to help by revisiting the programme targets, given the large negative shock registered on the economy by the floods. This created the expectation that there would be some softening in the enforcement of the conditionalities in the programme, that the overdue process of the fifth review would be completed and Pakistan would receive the tranche of $1.7 billion, which could be taken into the budget for financing the flood relief and rehabilitation effort. This type of fiscal augmentation is not unprecedented as $1,055 million of funds from the programme were allowed by the IMF last year to finance the budget.

Instead, Pakistan has been offered substantially smaller assistance of an emergency character of $450 million. As, expected these resources can flow into the budget and be used quickly for relief purposes. Also, as highlighted by the finance minister, they will represent an additionality in resources unlike the commitments from other donors.

But the ongoing stand-by facility has effectively been put on hold. According to reports, completion of the review is conditional on implementation of the Value Added Tax (VAT) or the reformed General Sales Tax (GST) by October 1 and further escalation of power tariffs by 16 per cent or so. The managing director of the IMF has indicated that the dialogue on the current stand-by arrangement is progressing and that the authorities have expressed their intention to implement measures for completion of the fifth review.

But in the present circumstances can Pakistan implement these reforms? The VAT should have been introduced on July 1 but was postponed because of lack of agreement with the provincial governments on the modalities of collection and sharing of the VAT on services and due to strong resistance of varied political interests and the trading community. How will the opposition be surmounted at a time when the government is politically vulnerable and market conditions are not so favourable?

The ministry of finance is clearly committed to reform and continuation of what has hitherto been a relatively ‘soft’ Fund programme with the semblance of a human face. But the recent track record is not encouraging in terms of enforcing economy in expenditure as demonstrated, for example, by the extravagant 50 per cent hike in salaries and in the inability to push ahead with major tax reforms like the VAT. Therefore, are we likely to see a ‘withering away’ of the IMF programme in the next few months? With reserves at $16 billion or so and the current account deficit having narrowed sharply last year, this may not be such an unattractive option in the short run for a beleaguered government trying to survive the flood shock and the likely backlash arising from the slow and tardy relief response. But, the cost may be a decline in flows from other multilateral and bilateral donors.

The time of reckoning will come when large debt repayments to the Fund start from 2011-2012 onwards. The covenants of the IMF and the World Bank rule out the possibility of any debt write-off or rescheduling. Will we go back to the Fund once again sooner or later and seek another programme which is likely to require far more structural reforms and stabilisation measures than the present vintage or will we be forced to explore other options? Such options could include seeking debt cancellation and/or rescheduling once again from bilateral creditors in the Paris Club and the launching of a strong programme of self-reliance based on a home-grown strategy, as and when conditions permit.

Published in The Express Tribune, September 16^th, 2010.