How important is the IMF assistance?

IMF has committed $7.6 bn assistance to be disbursed over 23 months. The country immediately needs more than this amount to replete its forex reserves to ensure stability in the rupee exchange rate
By Dr Mushtaq Ahmad

Pakistan is in a dire need of foreign financial assistance. There is a sharp depletion in its foreign exchange reserves. Rupee has depreciated 28 per cent. This is building enormous pressure on its public debt and reinforcing the inflationary trends. The manufacturing sector has recorded negative growth. The twin fiscal and trade deficits are presenting equally bleak picture.

While the economy came under stress, the policy makers have been making hectic efforts to explore all possible sources of aid. Finally they have succeeded in negotiating with the IMF a loan. Pakistan is its member and in the current situation it has the right to approach it while on the other hand it is also a mandatory obligation of this institution to assist its member countries. More recently it has come to the rescue of some other countries as well. Even in the past it has been assisting Pakistan on a number of occasions and on some occasions there were some adverse fall outs of its programmes for the economy, albeit debatable for its responsibility.

Debate is going on in the country on whether or not it is good to have the IMF loan. My effort in this paper is to present as an objective view of this assistance and to put forth suggestions to make the IMF assistance productive. It is quite normal for the IMF to attach some conditionalities with its loan and these often vary depending on the recipient country’s specific situation. Its interest rate is often less than the market rate.

The conditionalities are in fact the reform measures which the IMF considers necessary to put the economy back on the track. These have already been negotiated in case of the said loan but so far these have not been exposed to the general public. Given our situation these could possibly be like the increase in bank discount rate, elimination of subsidies, reduction in budgetary deficit and BoP imbalance, improvements in human development indicators, liberalisation of trade, privatisation, promotion of free enterprise, good governance, elimination of corruption, etc. Our long term development strategies of different perspective plans and budget documents stipulate similar reforms. So far there is no contradiction in perception. Moreover the country has already committed to these reforms as a member of the WTO. The problem is only of the timeframe and their sequencing.

The economy is in the grip of recession which is likely to worsen if the global financial meltdown further accentuates. The recent fall in international oil and food prices has unleashed prospects for some respite and that may work on the supply side. But still there is a need for massive efforts to revive the domestic production, particularly in commodity sectors. The IMF support to be routed through the BoP, which would eventually help improve the investment level in the country. Scaling down the public sector development programme would reduce the aggregate demand. Cement industry and construction activities are often the first victim of it and this will be having its adverse impact on employment situation.

In the current situation the economy can not afford further pressure and it has to be first pulled out of the turmoil. In recession, further tightening on the demand side either through higher interest rate or through more taxes would counter the salutary impact of the IMF assistance. The government has already reduced the volume of subsidies on its own. Now its further reduction would forestall the healthy impact of a fall in international oil prices on the cost side. There should be no mad rush for privatisation to avoid any possible loss in the sale of national assets. Its possible fall out for poverty has also to be kept in view.

There is no denying the fact that the economy is confronted with numerous structural problems but all can not be tackled at a time lest the system further derails. The country is in a state of war as the president has rightly stated in his address to the UN general assembly. This is itself a great challenge. To manage a weak economy in such a situation is a terribly difficult task. Moreover the leading coalition partner in the government is by its tradition considered pro-poor. The IMF assistance should not sabotage its programme.

The IMF has committed $ 7.6 billion assistance to be disbursed over 23 months. The country immediately needs more than this amount to replete its forex reserves at a level required to ensure stability in rupee exchange rate, not withstanding its massive requirements for building dams, expanding its social and physical infrastructure. Despite being not too big amount this does carry a great symbolic importance in a holistic sense. This will improve the country’s ratings in the international financial market. Other multilateral and bilateral donors give tremendous weight to the IMF’s assessment. Likewise would be the attitude of the newly formed forum, the Friends of Democratic Pakistan.

At the close of the 90s, Pakistan in consultation with its donors launched the structural adjustment and stabilisation (SAS) programme which was a broad based effort to reform the whole economic edifice. Over the last almost two decades its implementation has continued. While it was half way through, it was recognised that some goals have been partially achieved but the side effects appeared in slowing down the growth tempo and increase in poverty. The major flaw lays in time sequencing of the reforms measures. For example imports duties, the largest revenue spinner, were hugely slashed but the resultant loss could not be made up through consumption based taxes. Partial success on fiscal side was achieved entirely due to reduction in government expenditure as a proportion of GDP. That took a heavy toll on budgetary allocations for social sectors like education and health. This has fed the scepticism about the current IMF assistance.

Perhaps the greatest drawback of our policy formulation is that we don’t develop a consensus through a public debate. Therefore the ownership of the IMF programmes rests temporarily with the government in time. Some time policies and programmes fail because their pros and cons are not fully thrashed out. Once a programme is being negotiated with the IMF, then it is the responsibility of the national authorities to take all the stake holders into confidence. Simply to say that it is ‘home grown’ hardly enhances its credibility. The IMF has no logistics to defend each programme in recipient member countries.

I take this opportunity to underline a time sequencing mistake made by the State Bank of Pakistan by raising the discount rate on November 12, as one of the conditionalities of the IMF assistance (though not officially announced). In less than two weeks the Bank has reversed its policy stance and increased the discount rate by two per cent points to 15 per cent purportedly to curb inflation. Contrary to the Bank’s expectations it would stifle fragile investment impulses and accentuate the declining trends in growth.

During a short span of time from October 11 to November 1 the State Bank held the view that the banking sector was facing liquidity shortage. It eased its earlier tight monetary stance pursued since 2005. It thrice announced relaxing measures to reduce the cash reserve requirement (CRR) and statutory liquidity requirement (SLR). It estimated to have injected Rs.240 billion to ease the liquidity crunch. On November 12 the Bank has taken u-turn in its assessment of liquidity situation and reported that there is an excess liquidity.

— (The write is a former chief economist of Pakistan.)