Pakistan’s tryst with the IMF

Second chances are rare. Pakistan has had innumerable chances of participating in loan programmes supported by the International Monetary Fund (IMF). But this is half the truth. Most of the programmes the country signed onto were abruptly abandoned. Pakistan could not complete the programme stipulations during the tenure and opted out of them.

Coupled with these several incompletions is the fact that the design of Pakistan’s programmes with the IMF is at times overshadowed by expediency, deals more at the periphery, and remains short of tackling the fundamental issues. Take a look at an issue which is affecting the lives of 220 million citizens – the inefficiencies of the country’s state-owned enterprises (SOEs) which are a huge financial burden on the national exchequer and offer unsatisfactory services. This is a well-known truth.

The actions envisaged in the current programme for managing SOEs are hardly transformational. They include publishing audit reports of PIA and Pakistan Steel Mills, publishing a triage document of SOEs, preparing a new SOE law although most SOEs work under the well-established 2017 Companies Ordinance. More laws and documents can help only on the edges.

I, as a reform strategist, believe that Pakistan needs a massive divestment effort, large-scale financial re-engineering, and operational autonomy for SOEs – a real progressive reform of SOEs supported by the political, executive and other arms of the state. The above analysis may partly satisfy our curiosity as to why the economy is not in a great place even after decades of rendezvous with the IMF.

Pakistan was labelled a ‘one-tranche country’, having never really completed the stipulated term of a programme with the IMF. One was reminded of this stark reality when one began an involvement to support Pakistan’s tryst with the IMF initiated in 2013. The cliche bothered one’s sense of pride as a Pakistani.

Three years later on August 4, 2016, against a soundtrack of camera shutters, both sides – Pakistan and the IMF – proudly announced the first-ever successful completion of a programme, in Dubai. Travel restrictions to Pakistan forced Dubai to be the venue for 10 of the 12 IMF reviews over the three-year period. The completion was indeed a sense of relief to get some pride back.

Subsequently, circumstances unravelled in a less favourable manner. An insurmountable current account deficit and our relentless ability as a nation to shy away from fundamental changes in the economy yet again pushed Pakistan to sign a new programme with the IMF on May 12, 2019. This programme – with higher front-loaded conditions – was overshadowed by a new government which took more than usual time to decide between self-reliance and signing with the IMF.

Fast forward to today, the country is waiting for January 28 to get the IMF board’s approval for the sixth review. The prior actions of the government for the upcoming review are indeed some of the toughest seen in Pakistan’s history and other programmes supported by the IMF globally. As things stand, with gross financing needs crossing $28 billion for FY 2022-2023 alone, the IMF’s seal of approval seems a prudent way forward.

The IMF is the lender of last resort. Its approval ensures access to a host of multilateral and other international financing options. It may be argued that we can arrange short-term financing on our own – and surely we may – but the markets, both international and local, are jittery and our friends may also have exhausted their capacity to help. The IMF’s continuity can remove uncertainty and help Pakistan finance the short term. However, smart people know that a Plan B should always be ready.

There are many misconceptions about a country’s engagement with the IMF. Even though it is casually referred to as the IMF programme, it is not an IMF programme but an IMF-supported Pakistan programme. The country should take ownership of it. A few lessons learned during the last and the current programme and from global experiences may help strengthen the ongoing engagement.

It is helpful for a country to map out and put forward contours of an economic agenda which could become the basis of the initial Memorandum on Economic and Financial Policies (MEFP), the document a country signs for approval of the IMF board at the start of a programme. The MEFP is subsequently updated during 12 quarterly reviews with the fund over three years. Each review examines the agreed stipulation from last time and negotiates new prior actions, structural benchmarks, indicative targets and performance criteria. The complexity of the above technical jargon highlights the technicalities involved. The success of an IMF-backed programme hinges on a country’s preparation, ability to interpret data, and competence of technical analysis - all dependant on high-calibre and trained professionals and a thoroughly prepared team.

The IMF has personnel with tertiary education and relevant training, though a country’s context-based understanding is hard to come by in a short time. On the other side, country teams tend to be crowded with more generalists who also are busy in day-to-day work alongside the IMF negotiation. Both aspects need a design overhaul.

A country needs to have an unbiased understanding of key economic indicators and should use the Fund’s expertise to fill in the knowledge gaps. Country teams must believe that they certainly know more than their counterparts about their own country. This gives a sense of confidence and helps negotiate from a position of strength.

It may not be out of place to mention that the IMF can be surely more thoughtful in its approach. Inflation today is an economic and social concern. An emphasis on a large indirect tax effort of Rs343 billion, in addition to Rs750 billion of new tax policy measures already taken at the start of the program in 2019, does carry a certain burden of price hike. A substantive increase in petroleum levy and a full pass-through of energy prices at a time of double-digit inflationary pressure, doesn’t paint an inspiring picture. We should always be sympathetic that Pakistan remains to be a country with high inequality and uncomfortable social indicators.

There has been a debate on a potential compromise of Pakistan’s sovereignty. Going to the lender of last resort may at times infringe on sovereignty. Where one had always argued for the sovereignty of parliament, that space seems to have been lost. The submission of laws to parliament as a condition of the MEFP has been converted to ‘approval’ by parliament as seen in the case of the two current bills – the mini-budget and the State Bank of Pakistan autonomy law. An uneasy disposition.

A reasonable way to overcome the sense of a loss of sovereignty is by trying to be so well articulated that we match and, hopefully, outperform our counterparts in facts, data, economic modelling and policy prescription. Not sure if the Pakistan side has made all this happen. Undoubtedly, the country should take the necessary steps to never have to refer to any ‘lenders’ of last resort in the medium term. A topic we hope to explore in subsequent writings.

The writer is former adviser, Ministry of Finance. He tweets @KhaqanNajeeb and can be reached at: khaqanhnajeeb@gmail.com