The deal struck with the IMF by our finance minister, Ishaq Dar, indicates that the so-called Plan B was never there. Our newly elected government had already decided to tread the beaten path of beg now, reform never. In fact, the talk about the inevitability of the recourse to the IMF was a farce. Just look at the critical elements of the crisis at hand: a measly current account deficit of less than one per cent of GDP, an improving trade balance, booming remittances, single-digit inflation. Compare it with the crisis when the IMF was approached in 2008: a current account deficit of 8.5 per cent, an inflation rate of 25 per cent, global financial crisis, oil and food price shocks. Only the fiscal deficit is now higher — nine per cent compared with 7.5 per cent. Had the finance minister put his accountant’s hat aside while doing his budget numbers, he could easily have fixed an achievable target for fiscal deficit. Making allocations without preparing projects or programmes is bad budgeting. Avoiding the uncalled-for increase in salaries and the Benazir Income Support Programme would have kept the deficit around 5.5 per cent rather than 6.3 per cent.
What could have been done about the depleting reserves? Echoing the classic debt trap, the finance ministry was forced to borrow to repay past debts. On June 28, 2013, the reserves stood at six billion dollars. In spite of the deal with the IMF, this is what the ministry has until the first week of September. It could, therefore, have done whatever it plans to do now. To say that the IMF conditionality is essentially what the PML-N manifesto promises is an afterthought on its part. Had the main points of the manifesto been made part of the budget to send a strong reformist signal, the game would have been qualitatively different.
Like the budget, our finance ministry took the disastrous plunge into the deal with the IMF without much preparation. The final approval by the IMF board in September is conditioned upon prior actions. Before a dime is disbursed, Pakistan will have to reduce fiscal deficit to six per cent from the budgeted 6.3 per cent. Dar’s claim that no new taxation has been agreed to means that the fiscal deficit would have to be reduced by other means. First, the energy plan would now focus more on slashing subsidies than on measures to reduce load-shedding. Second, instead of improving their governance, a distressing sale of public-sector enterprises would take place. Third, the Council of Common Interests would dictate the provinces to spend less than their NFC shares, a serious challenge to provincial autonomy and an expression of donor disdain for the Seventh NFC Award. Third, any gaps left by the aforesaid measures would be made costlier to fill by a tight monetary policy. Finally, depreciation of the rupee will add to the debt burden.
A budget focused on energy, along with a short-term survival strategy, would have earned a better deal from the IMF, if one was still needed. As it is, the reform will be sold as an IMF imposition. Powerful vested interests either block reform, as in the case of agricultural incomes, or thwart legislation, as seen in the long list of exemptions in the Sales Tax, 1990. Instead of the much-abused verse from Iqbal, this deal reminds one of the 1950s movie, The Mouse That Roared.
Published in The Express Tribune, July 12th, 2013.