Intent and intentions
In IMF language, a ‘Letter of Intent’ is a letter from a government to the IMF, diagnosing the problems facing the economy and outlining economic reforms to be made in order to receive an IMF loan.
The letter is written jointly by a country’s finance minister and the governor of the central bank. Two attachments with the letter, the ‘Memorandum of Economic and Financial Policies’ and the ‘Technical Memorandum of Understanding’, outline a comprehensive undertaking by the borrowing government of the detail and deadlines of conditions that a country must implement in order to access the IMF’s resources.
For transparency’s sake, the IMF requires the governments that write the letter to give consent to the IMF’s publication of this letter and its attachment. All the letters of intent submitted so far by Pakistan are available on the IMF website and must be read to get an idea of who committed what and what went wrong with the previous IMF programmes.
Let us analyze the latest letter of intent, submitted on June 19, 2019 by Hafeez Sheikh and Reza Baqir. They diagnosed lack of attention to the implementation of much-needed structural reforms, expansion of avenues for domestic revenue mobilization, and resolution of the inefficiencies and losses in State Owned Enterprises (SOEs) as the root cause of Pakistan’s economic problems.
To overcome the current account and fiscal deficit, the government has planned to implement stabilization policies, enduring structural reforms (for strengthening institutions), and expanding social safety nets to cushion the impact of the needed stabilization policies on the poor.
According to the letter, prior actions taken by the government to show seriousness about reforms include the adoption of the FY 2020 budget consistent with (IMF) programme targets to kick-start fiscal consolidation (read: tax measures and withdrawal of exemptions to reduce imbalance between income and expenditures); adoption of a flexible market-determined exchange rate as a buffer against external shocks (SBP intervention in the foreign exchange market will be limited to preventing disorderly market conditions and a possible exchange rate overshooting but not suppressing a trend); and a further tightened monetary policy to shore up confidence and control inflation (increase in mark-up by 150 basis points). Furthermore, increased gas and power tariffs to stop the growth of quasi-fiscal deficits (to address the energy circular debt); and Eepanded social support, including through the establishment of Ehsaas as the government’s main poverty reduction and safety nets programme.
Among the structural benchmarks to be achieved during 2019-2020, the government has committed structural reforms to address energy losses/debt (Nepra and Ogra’s recommended tariff to be passed on to consumers, except lifeline consumers); the issue of loss-making SOEs; and giving more autonomy to the SBP. To document the economy it has committed to strengthen the effectiveness of the AML/CFT framework and issue licences for the track and trace system for excise on cigarettes.
For social protection and gender, the government commits that by October-2019 it will finalize BISP’s banking contract (so that BISP beneficiaries may have their bank accounts, leading to their financial inclusion); by December 2019 it will update the benefit structure of Waseela-e-Taleem (to narrow down the education gender gap), and by end June 2020 it will finalize the update of the BISP beneficiaries’ database (National Socio-Economic Registry).
The performance criteria and indicative targets against which Pakistan’s performance would be gauged during the current fiscal year include increasing $7 billion in our net international reserves (bringing them from $(-)17 billion to $(-) 10 billion), quarterly targets for tax collections, improving primary budget deficit, and assured spending on BISP, health and education initiatives.
The economic challenges facing Pakistan are chronic; that is why the diagnosis, treatment, and structural benchmarks for the current loan are not very different from the one which finance minister Dar, and SBP governor Yasin Answer proposed in their letter of intent submitted to the IMF in 2013.
Like now, in 2013 too the diagnosis was that “poor economic management during the previous government and unaddressed long-standing structural problems have led to falling capital inflow and large reduction in international reserves”. Like now, in 2013 too the prescription to address Pakistan’s economic issues was “to strengthen macroeconomic and structural policies to shore up confidence and to reduce economic imbalances”.
Incidentally, the prior actions taken for the 2013 loan were also quite similar to current prior actions – adoption of budget 2013/14 to implement fiscal adjustment measures; steps to improve the State Bank’s foreign exchange reserves by purchasing a certain amount of US dollars from the spot market; a three-year plan to phase out the energy circular debt through increase in tariff and reduction of subsidies; and to improve tax revenue/documentation of the economy serving 10,000 tax notices to large potential tax evaders. Like now, in 2013 too government committed to improve net international reserves and address the issue of the SOEs.
One cannot deny the fact that achieving macro-economic stability has a negative impact on the micro-economic stability of the common people. That is why it is important to pursue two parallel policies, one that addresses economic imbalances and one that insulates people belonging to low-income strata from the shocks of structural adjustments.
In 2013, the government did not make any binding commitment to strengthen social protection. However, this time it has made it binding upon itself to strengthen social protection spending as part of structural reforms – and that is where Letter of Intent 2019 differs from Letter of Intent 2013.
The letters of intent submitted by successive governments of Pakistan for IMF programmes reveal that all of them were clear on what went wrong with the economy of Pakistan. All of them blamed their predecessors for inaction, thus none of them took the complete ownership of the IMF programmes. The majority of them left the IMF programme inconclusive. In rare cases where they successfully concluded it, they had to apply for waivers (not able to fulfil the commitments; the previous government got 16 waivers).
The take-away from Pakistan’s experience with the IMF is that it is not the letter of intent but the intentions that matter. By pursuing parallel policies of fiscal consolidation and socio-economic protection at the micro level, the journey to attain macro-economic stability may be turned less painful. However, that would require good intentions.
Let us see whether this time we can go beyond the letter of intent.
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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.