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Tuesday, June 11, 2013 Time to go to the IMF

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Dr Ashfaque H Khan Whenever a country faces a serious balance of payment crisis, it goes to the IMF to seek balance of payments support. While providing resources, the IMF asks the government to restore a balance between aggregate demand and aggregate supply by pursuing a tight fiscal and monetary policy so as to curtail the former and implement growth-critical reforms to boast the latter. During October-November 2008, Pakistan went to the IMF for a bailout package and received heavy upfront payment to bolster foreign exchange reserves. Pakistan, on its part, failed to implement various economic reforms, particularly in the areas of resource mobilisation, the power sector and public sector enterprises (PSEs). The IMF programme got suspended in May 2010, and remained so until the expiry of the tenure of the programme. As a result of reckless fiscal and inappropriate monetary policies pursued during the last five years, Pakistan has once again become embroiled in a serious debt repayment crisis. Those who negotiated with the IMF during October and November 2008 were inexperienced people, who never realised that the large sum the country was borrowing from the IMF would have to be repaid within a couple of years. Today, the nation is paying a heavy price for their mistakes. Uncertainty has surrounded Pakistan about its capacity to repay external debt in the midst of rapidly declining foreign exchange reserves. The Associated Press, in its June 2, 2013 story (The News), has commented that there have already been worrying signs in Islamabad, where commercial banks have begun telling customers trying to withdraw dollars that they are not available, or that they need to make a special request. While local and global investors are very upbeat about the prospects of the new government turning around the economy, they are watching us anxiously from the sidelines. They have huge plans to invest in Pakistan but are waiting for the new government to unfold its medium-term (five years) economic reform agenda and macroeconomic policies. While the power sector crisis is consuming the bulk of the new political leaderships time, perhaps little time has been devoted to yet another challenge the task of making Pakistan solvent. How can the government prevent the country from defaulting on its external debt payment obligations? There appear to be two schools of thought: one that argues that we should go to the IMF to prevent a full-blown economic crisis and the other that says that we can wait for the time being to seek IMF assistance. The proponents of the IMF programme base their judgement on the fact that, since the suspension of the IMF programme in May 2010, Pakistans external inflows have dried up and that it has been making payments to its external creditors from its reserves and as such has lost over $8 billion since then. Pakistans foreign exchange reserves have declined close to $6 billion, 40 percent of which are borrowed from commercial banks in the forward market. Any further decline in the State Bank of Pakistans (SBP) reserves may force commercial banks not to roll over their lending to the SBP. Such a move could create a crisis of confidence and could plunge the country into deep crisis. Pakistan will have to make payment to the IMF on June 28 amounting to $264 million. Furthermore, during July-December 2013 an additional over $2.0 billion will have to be paid to the IMF alone. It is in this perspective that the proponents of the IMF programme are suggesting that Pakistan should negotiate a medium-term programme at its earliest to prevent a full-blown economic crisis. Others argue that Pakistan should wait for four or five months, prepare its own home-grown reform agenda and then negotiate with the IMF for a new programme. The proponents of this view believe that the new government will be able to secure alternative funding, which can provide them some space to do their homework. This can be a good strategy but risky as well. Recent experience (2009-10) in Pakistan suggests that relying on uncertain flows have created serious budgetary as well as financing difficulties. How credible these alternative funding sources are not known , at least to me. Even if this source of funding is credible, it will simply postpone the inevitable and will not

in any way help the government in negotiating a programme. My suggestion is that, since an IMF mission is arriving on June 19 for post-programme monitoring, Pakistan may like to start a negotiation with them for a new programme and seek funding amounting to the remaining amount to be paid to the IMF. What could be the critical agenda of reform that the IMF may like to see Pakistan implement in the medium-term? My experience and understanding suggest that there will be three critical areas where Pakistan will have to deliver resource mobilisation power sector reform and restructuring and privatisation of public sector enterprises (PSEs). All these critical areas are part of the PML-N manifesto. The PML-N manifesto argues that all income, irrespective of sources of generation, should be brought under the direct tax net. In other words, the PML-N believes in broadening the tax base and taking the taxto-GDP ratio to 15 percent by the end of its tenure. This is exactly what the IMF may suggest the government to do and may form part of the IMF programme. The present government and its political leadership are already working seriously on power sector reform even before taking charge of the state formally. The government has already prepared a wide-ranging short-to-medium power sector reform programme, which can form a part of the reform agenda for the IMF programme. This reform agenda includes shifting of gas from CNG to the power sector through economic as well as administrative measures, improving governance in utility companies by appointing professionals through open merit to run Discos, coming down hard on power theft, targeted power sector subsidies to deserving segments of society and augmenting power supplies to the system. On restructuring and privatisation of rotten PSEs, the prime minister himself stated at the National Assembly that a new management consisting of professional CEOs and independent boards would be appointed with performance targets. Once the health of these PSEs is improved, the government would consider privatising them. These are positive steps in the right direction. These reform plans can form the reform agenda for the IMF programme. The government has already announced that it will not only promote austerity but also go for resource mobilisation. It has also announced that it will strengthen tax authorities and bring in the right people for the right jobs. I dont see any conflict between the would-be reform agenda under the IMF programme and the reforms listed in the PML-N manifesto as well as the statements of its leadership. It is, therefore, suggested that Pakistan starts negotiating with the IMF for a new programme. This will give confidence to both local and foreign investors to invest in a big way. It will be good for the economy as well as for the PML-N leadership. The writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk

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