Negotiating a way out

Ordinarily, we view govt’s inability to meet lenders’ covenants with suspicion. In this case, its clearly right.

After months of essentially pretending that the problem did not exist, it appears that the government has finally woken up to the fact that it has a foreign exchange reserves problem, and has finally begun taking measures to address it. The government’s move to go to the International Monetary Fund (IMF) and seek an easing of absurdly unrealistic targets on the external front is a welcome move. While Islamabad habitually renegotiates its bailout package with the IMF, mostly owing to its failure to meet the Washington-based lender’s targets, the fault this time lies squarely with the Fund itself. Its negotiating team apparently was far more concerned with the sort of precedent its agreements with Pakistan would set for its negotiations with other countries rather than recognising the realities of the Pakistani economy.

For instance, the IMF has repeatedly expressed its unhappiness with interest rates set by the State Bank of Pakistan, even though real interest rates in the economy are positive, and for the first time in well over two decades, fixed income investors in the country are actually getting a real rate of return. But instead of paying attention to the numbers, the IMF rolled out a cookie-cutter plan that will only exacerbate Pakistan’s economic slowdown. And then there was the currency depreciation debacle. The IMF insisted that the Pakistani rupee is overvalued relative to its peer currencies, but failed to take into account that Pakistan is far more reliant on imported fuels than most other Asian economies. Simply put, a depreciation of the currency has far more of an inflationary impact in Pakistan than it does in most other countries in Pakistan’s peer group. And yet, simultaneously, the IMF wanted Pakistan to keep inflation in check. The initial IMF package was badly negotiated by the government. Ordinarily, we view the government’s inability to meet lenders’ covenants with suspicion. But in this case, it is clearly in the right and we applaud its efforts to correct its mistakes.

Published in The Express Tribune, November 1^st, 2013.

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