Back to IMF conditionalities
By Zafar-ul-Hassan Almas

Pakistan’s growth model for the last sixty years was heavily reliant on foreign exchange inflows. The economy crumbled whenever inflows depicted a topsy-turvy behaviour. This kind of an arrangement has been working for many years now and we have come to a point where we cannot think of a respectable growth or a stable macroeconomic environment without foreign exchange inflows. Not only have the non-debt creating inflows dried up but debt creating inflows have also lost its way into the economy.

Not in the distant past many official economists (in 2007) were convinced that Pakistan could withstand all types of stoppage of external inflows. It requires some thinking that the growth model of Musharraf regime was extremely centric upon foreign inflows and thus growth was financed by external inflows but his core team didn’t pay much attention to such inflows. I remember Former State Bank of Pakistan (SBP) Governor Dr Ishrat Hussain was adamant during a seminar in London in May 2007, that “under the highly improbable case scenario where the US, along with all multilateral development banks and bilateral donors, withdraws its assistance of all types in one go, Pakistan’s economy was unlikely to face any serious risk”.

He had expressed the same view earlier in an article he wrote for English daily on April 16, 2007. In his opinion the worst-case scenario will have a consequence in the form of “an immediate drawdown of Pakistan’s foreign exchange reserves from $13.5 billion (in April 2007) to $9.5 billion and the policy-makers will have to make necessary adjustment in the country’s imports and other foreign exchange expenditures, take steps to attract a larger volume of remittances and foreign direct investment and access the international capital markets”. These official economists were citing examples that Pakistan had successfully withstood the internal and external shocks like severe and prolonged drought, mobilisation of Indian troops on the borders, terrorist attacks on foreign nationals, the war on terror in Afghanistan, massive earthquake of October 2005 and the oil price hike. None of these shocks has hurt macroeconomic stability or growth.

Pakistan economy is facing mounting pressures from ever-rising inflation, food prices, the acute power shortages, a bewildering stock market and a perceptible slowdown in the manufacturing and services sectors, a sharp increase in interest rates, widening twin deficit. Pakistan is badly struggling to finance a modest growth of 5 per cent. The country is confronted with the worst trade, current account and fiscal deficits in 10 years. The problem is exacerbated by severe power shortages and no investment is in sight to meet the expanding power shortage. Now we are looking for Ishrat Hussain type of economists who were provoking the donor community by undermining their importance for Pakistan.

Pakistan has to approach IMF for help and support after divorcing it in December 2004. IMF has many positive contributions to Pakistan economy like reinforcing fiscal discipline in the country during the early 2000s when we were in the four year programme of Poverty Reduction and Growth Facility (PRGF) during 2000-2004. This programme has laid the foundations for stringent fiscal discipline in the country and exposure requirements of the programme has helped in promoting greater transparency in fiscal policy making. This programme may have some pitfalls and omissions but overall the programme was successful in bringing down the level of the poverty as shown by official statistics for FY-2005.

Pakistan critically needs macroeconomic stability at this critical juncture when all its macroeconomic indicators are on their lowest ebb, large-scale manufacturing sector is facing negative growth for the last four months, acute energy shortages are inimical to economic activity and they are haunting sustainability of the economy, inflation has touched 25 per cent, foreign exchange reserves are depleting at a faster pace, exchange rate stopped its downward slide just after news of IMF accord was spread through media, current and fiscal account deficits are unbearable. These all elements have threatened existence of millions of people surrounding poverty line. We need a macroeconomic stability programme and it is not possible without a watchdog like IMF is monitoring. The political profligacy is evident from large size of the cabinet and over 200 members Presidential entourage to Saudi Arabia.

According to the adviser to Prime Minister on finance, his technical team had negotiations with the IMF for a short duration stand-by arrangement for this fiscal and the next fiscal. However, Pakistan has to submit formal letter of intent for the program. Although details of the programme and its nitty-gritty are not known but the timing of the programme is perfect and relevant. When we are not getting funds from ‘friends’ or donors, we need special support from the IMF. Normally stand-by arrangements of the IMF are based on a mutually agreed performance criterion and recently IMF has singed such agreements with Ukraine and Iceland on very modest conditions. I can guess that Pakistan’s case will not be different from these two countries.

During the first quarter Pakistan is following a fiscal discipline which is very close to IMF’s generally prescribed policy packages like elimination of across the board oil, food and electricity subsidies, more revenue mobilisation efforts, expenditure cuts, etc. Pakistan has already done liberalisation of trade and exchange rate regimes in the 1990s and we have a more liberal external regime than any other developing country of this level. So why we are weary of an IMF programme of a shorter duration which is not based on conditionalties.

Most people believe that harsh conditionalities tied to previous programs of the IMF and the World Bank were responsible for overall deterioration in the socio-economic conditions in the 1990s. Conditionality associated with the SAP loans were: improvement in overall macroeconomic conditions like reducing budget deficits, devaluation, and reducing domestic credit expansion, and structural conditions like freeing controlled prices and interest rates, reducing trade barriers, and privatising state enterprises.

IMF is associated more with the former and the bank with the latter, in practice neither will proceed with an adjustment loan unless the other is satisfied with progress on "its" area of responsibility. These conditionalities have far reaching implications on Pakistan’s economy. Some of them contributed to improving competitiveness of Pakistan’s economy and added real strengths to Pakistan economy, however, some has adverse implications.

The last programme of the IMF under the ‘poverty reduction and growth facility’ (PRGF) and ESAF started in early 2000 and by that time the country stood at the brink of default on its foreign debt. Hardly any international donor or creditor, private or public, was prepared to provide financing to sail Pakistan through this crisis. The timely help of the IMF averted a crisis of possibly massive bankruptcy and layoffs and even more grinding poverty. This was the time when Pakistan managed some fiscal space to move forward and push the economy forward.

Today again the situation is similar when nobody is ready to finance ‘mismanagement’ and for this IMF is back. It is the economic managers’ fault for not putting own house in order and relying heavily on external resources. It is the time to revitalise the economy by harnessing hidden potential of it rather than looking at others to rescue. The mismanagement of the economy placed Pakistan in this precarious situation and IMF is extending its helping hand. This will provide Pakistan with some breathing space and this breathing space to restructure Pakistan economy to make it self correcting. We have to prepare a long-term plan to commit ourselves to a greater economic and fiscal discipline so that after four or five years we should not look at another saviour.