Action and solution
From choosing between approaching and not approaching IMF, the discussion now focuses on the nitty-gritty of Pakistan’s home-grown solution that it will present to the IMF for its forthcoming arrangement.
The catch, though, is to maintain a fine balance between economic reforms that strengthen the overall fiscal responsibility at the federal and provincial levels under an IMF programme, and an indigenous agenda of structural reforms in power and public-sector enterprise (PSE) management while designing such home-grown solutions.
Going to the Fund would have some structural and implementation conditionalities. Structural conditionalities would include some ‘prior actions’, some ‘performance criteria’ and certain ‘benchmarks’. On the other hand, implementation conditionalities would include quantitative performance criteria, actions implemented in time, actions delayed, actions not implemented, and actions against which a waiver was given by the IMF.
For a three-year programme, under a front-loading arrangement (which Pakistan cannot skip), almost half of the actions are required to be taken in the first year whereas the rest of them are to be taken in the second and third years. Usually, the first year is focused on achieving stability of macroeconomic fundamentals, especially the stability of foreign exchange reserves. The second year is aimed at completion of stabilisation measures and enhancing the efficiency through structural reforms, whereas the third year should focus on pro-growth and pro-job policies.
It is pertinent to mention that Pakistan took the following ‘prior actions’ (they were to be taken five days prior to the board meeting where the loan was approved) before the last IMF programme (2013-16): implementation of a series of fiscal adjustment measures; elimination of electricity tariff differential subsidies; net purchases of $125 million by the SBP in foreign exchange spot market; an agreement at the Council of Common Interest on respecting the 2013/14 fiscal balances for the provinces under the programme; and issuance of 10,000 collection notices to individuals not registered to pay taxes based where indirect methods suggest large potential income tax liabilities.
Fiscal belt tightening, reduction in electricity subsidies, and appreciation of the dollar against the rupee were a natural outcome of those prior actions. But they were necessary to convince the IMF Board that Pakistan was serious to implement reforms against the structural anomalies threatening its macroeconomic sustainability.
Apart from those prior actions, the structural benchmarks that Dar’s team agreed for the last IMF loan included approval of a reform strategy for loss-making public-sector enterprises (PSE), hiring a professional audit firm to conduct a technical and financial audit of energy circular debt, making the Central Power Purchasing Agency (CPPA) operational by separating it from the National Transmission and Dispatch Company (NTDC), privatising 26 percent of PIA’s shares to strategic investors, and enacting the amendments to the Pakistan Penal Code 1860 and the Code of Criminal Procedures 1898. All those benchmarks were to be achieved before December 2013.
Backed by certain one-off positive factors including low fuel prices in international market, CPEC inflows, $5 billion from Saudi Arabia, and foreign exchange generated through bonds and auction of 3G-4G broadband spectrum, the IMF loan resulted in a favourable growth momentum. However, the failure of implementing structural reforms in letter and spirit resulted in a widening of external and fiscal imbalances, and a decline in foreign exchange reserves.
One needs to keep Pakistan’s immediate past engagement with the IMF in mind while negotiating the next arrangement, as the IMF will pick Pakistan on its slippages in that programme. In its first post-programme discussion (PPD) in February 2018, the IMF mentioned widening external and fiscal imbalances because of those slippages and emphasised on continued exchange rate flexibility, monetary tightening, stronger fiscal discipline, and decisive efforts to contain losses in public enterprises.
Taking cue from that PPD, the elements of home-grown reform agenda – apart from realistic monetary policy and continued exchange rate flexibility (which is now more or less adjusted to its real effective exchange rate) – may also include rationalisation of the government’s current expenditure (that is: rationalisation of grants and subsidies, PSE reforms, rationalisation of ministries and departments). They may also include tax policy and administration reforms (broadening of direct tax base and a gradual shift away from the withholding tax regime, taxing all income beyond a minimum threshold, a gradual move towards modified value added tax, correcting custom duty, and giving the FBR autonomy); and power and gas sector reforms (new national power policy, going towards a single transmission and many distribution companies, and control of unaccounted-for gas).
Many of the above measures would have to be taken as ‘prior actions’; many others would have to be carried out in the first year of the arrangement. They would certainly have inflationary impacts. Low global oil prices helped the PML-N address the inflationary impacts of their loan programme. However, it is expected that once the US sanctions against Iran are enforced (from November 4) the oil prices will go up. High oil prices and a depreciation in the rupee’s value would not only increase inflation (at least in the medium to short term), but under a contractionary monetary policy would also slow down growth. This would bring the PTI under immense pressure as people’s expectation from the PTI for inclusive and sustainable growth are much higher than from its predecessors.
All this would require an out-of-box solution to mitigate the negative impacts of inflation and to improve pro-poor spending. In the last two arrangements with the IMF, the PPP and PML-N very successfully presented BISP as an inflation mitigating measure. There is no doubt that BISP is playing an important role in consumption smoothening of the lower-income strata. However, part of the bargaining with the IMF should be to get a cushion for spending towards environmental protection, food security and human development priorities under the SDGs while negotiating the fiscal deficit target.
Analysing Pakistan’s last two arrangements with the IMF, one infers that the structural problems facing our economy are persistent – as are the home-grown solutions. However, one also infers that – despite the imperfection of those solutions – we could have avoided approaching the IMF had the ‘prior-actions’ taken in previous programmes gone beyond merely satisfying the IMF Board, and had the ‘structural benchmarks’ agreed in those programmes been achieved successfully. Will this time be different?
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.