How not to negotiate with the IMF

What we have, thanks to Dar’s irrational exuberance, is an IMF drone.


Dr Pervez Tahir July 04, 2013
pervez.tahir@tribune.com.pk

Negotiating a programme with the IMF has always been very difficult for Pakistan. More so, when we are seen to be desperately discussing an urgently needed bailout package. That is why, perhaps, the ongoing negotiations in Islamabad had seemed so difficult. To understand these difficulties, let us step back a little. During the election campaign, the venerable Sartaj Aziz had said: “Right now, you can’t reach an agreement with the IMF because the kind of conditions they would impose on you would not allow you to grow. But if our economic revival package starts working in two months, three months’ time, and it is clear that exports are picking up, our revenues are going up, then you need much less adjustment than indicated by the present situation.”



Dar ignored this sane piece of advice. First, he presented a budget with a deficit of 6.3 per cent. There is no way the IMF could stomach a fiscal deficit target beyond four to 4.5 per cent. It could have been fixed around five per cent anyway if: 1) the government had not increased the Public Sector Development Programme by 50 per cent to accommodate its politically motivated programmes; 2) it had not surrendered to the bureaucracy’s demand to increase salaries and pensions by 10 per cent; and 3) eliminated tax exemptions on its own. Instead of finalising its own energy plan first, the IMF was allowed to dictate the end of power subsidies within a tight time frame. It does not take kindly even to the lifeline tariff for the smaller consumers, the preference being for conditional cash transfers. Unfortunately, the State Bank of Pakistan also made a political statement by announcing a cut in the policy rate at a time when core inflation is still running above headline inflation. Worst of all, the finance minister announced on the floor of parliament that Pakistan needed the new IMF loan just to repay the earlier loan from the same institution. By implication, the intent was not reform but access to ready cash.

Like the hero in Punjabi films, he unleashed a series of economic barhaks from the word go. “Programme or no programme, we shall not impose further taxes.” It was pointless to make a request, if this was a non-negotiable position. The IMF knows enough about the capacity of the Federal Board of Revenue to reject the position that it can collect the desired revenue by toning up its administration. Millions of dollars poured in it by donors have made little impact on its governance. The SROs, lax audits and the slow pursuit of cases against tax delinquents are part of a culture that defies all reform.

Dar said he would negotiate, not beg. There was a needless invocation of national interest. In the same breath, he warned that the country could be reduced to a banana republic if the IMF did not help. The thought that he could negotiate without being flexible, bordered on the ridiculous. “I need six months to turn around the economy, but my problem is that the country has to return a substantial amount to the IMF soon,” he went on to claim. While there is no magic wand to turn the economy around in such a short span, a sounder budget and an austere balance of payments, together with some elements of the so-called plan “B”, would have provided the breathing space to stabilise the economy. It would have also prepared better ground for negotiating a deal with the IMF. However, the PML-N’s structural weakness — a bias against taxation and towards imports — has come in the way. It had promised an economic blast. What we have, thanks to Dar’s irrational exuberance, is an IMF drone. Is it any wonder that Secretariat Block Q was declared out of bounds to the media?

Published in The Express Tribune, July 5th, 2013.

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COMMENTS (26)

excalibur | 10 years ago | Reply

I can only sympathise with IMF if Executive Directors still need Senior Advisors like you ( if that is true to begin with )

How come you are not aware of the compliance meetings ? As for Dar he was the first FM even for the PPP govt ( But quickly absconded citing the same excuse s as he parrots today ) If you really have any IMF link as you claim you would also remember the MoF letter dated November 18,2008 submitted by ShaukatT areen to the IMF in Dubai which claimed all the structural reforms of Shaukat Aziz;s as credit and based only upon that the IMF agreed to give bakshsish to PPP govt

As for Musharraf / Shaukat Aziz I challenge you to bring up any thing against them in this forum Casting aspersions will not do.

meekal a ahmed | 10 years ago | Reply

@excalibur:

OK, I see "where you are coming from", as the American's are fond of saying.

Are you an economist as well as someone who knows something in regards to Pakistan-IMF relations?

Since you have a phony log-in name, I don't know who you are.

But never mind.

While I am always open to new information that may suggest that I was wrong (I hope, God forbid, that I never gave the impression that I was always right), please don't be condescending. I know about "quarterly reviews" and "compliance", based on 15 years as Senior Advisor to Executive Director, in the IMF.

In that regard, here is a story that you may find interesting:

When Dar was briefly FM under the new Zardari government in 2008, to extract revenge (or so it seemed since Shaukat Aziz had ratted on him ten years earlier), one of his first acts was to start digging up the dirt on "compliance" with the SBA and PRGF during the Mush era (I was told that Dar denied this when asked in the Senate).

But when I heard of the muck-raking, I sent an e-mail to my very good friend in the MoF (his name shall remain a secret) who was tasked with digging up the dirt, and pleaded with him NOT to open a can of worms.

Because, if he proved (as he was tasked to do) that we had been cooking-the-books under both the SBA and PRGF during the Mush years, there would have been an investigation, and we would have had to return millions of SDR's to the IMF as penalty for "mis-reporting" -- as we had done before.

Fate intervened, the PML-N and Dar left the government, my very good friend went home, the matter was, and remains, buried, and I heaved a sigh of relief.

There has been a lot written on the wonder years of Mush. You should read some of it.

Have a great evening.

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