Dealing with the IMF

Courtesy:- DR HAFIZ A PASHA

The third review of the IMF program is currently taking place in Dubai. This time the Ministry of Finance (MoF) will be talking from a position of strength. Foreign exchange reserves have jumped to $7 billion, a doubling since the last review. This improvement started with the receipt of a large 'gift' from a friendly country of $1.5 billion, preceded by the announcement that the Chinese EXIM bank is willing to invest a massive amount of $32 billion in the energy sector and other infrastructure projects in Pakistan. The recent success of Pakistan in selling Eurobonds of $2 billion is the last factor contributing to the big jump in reserves. 

The resulting exuberance of markets is revealed by, first, the record increase in share values in the Karachi Stock Exchange. Second, the rupee has appreciated substantially by over 10% since early March 2014. Clearly, there is need to recognise the performance of our Finance Minister who has succeeded in less than one year in bringing about a fundamental change in market sentiments. 

The dominant feeling now is that the process of 'survival' of the economy is over. Macroeconomic imbalances are smaller and foreign exchange reserves are now at relatively safe levels. As such, the political leadership may feel that the time has come to push for a strong 'revival' of the economy and provide tangible relief to the people in line with election promises, especially in the forthcoming budget of 2014-15. 

The IMF is beginning to sense this change of mood in the MOF. Quite unexpectedly, on 12th of April, the IMF Mission Leader to Pakistan, Jeffrey Franks, made the following statement: 

'Pakistani officials in times of financial crisis take loan and forget the pledges as soon as they are out of the crisis. This practice must end.' 

He reminded the government that it must meet its promises made relating to reforms, particularly in the energy sector and the taxation system. 

There is no doubt that the equation between the IMF and Pakistan has fundamentally altered. With reserves at close to $7 billion and the prospects of further inflows, including the receipts from 3-G auction and privatisation, the Fund can no longer dictate the fulfilment of tough conditions. 

Therefore, one option is for Pakistan to negotiate a more 'homegrown' package of reforms and seek relaxation of some of the targets and performance criteria. This package could include the following, with the impetus for implementation coming from the Prime Minister himself: 

(i) A budgetary allocation for the Prime Minister's Youth Programme, beyond the interest rate subsidy. 

(ii) Management of the Pakistan Development Fund, outside the regular PSDP, focusing on the Karachi-Lahore Motorway and other projects in the transport sector, while avoiding the normal approval processes of CDWP and ECNEC. 

(iii) Resumption of the allocation of development funds to elected representatives. 

(iv) Continuation of the amnesty scheme of no questions asked on investments in the stock market. 

(v) Suspension of international bidding practice on projects financed by China. 

There is also the likelihood that the government may adopt a different strategy to tax reforms, including the conversion of the present GST, with the characteristics of a VAT, to a single-stage sales tax. This will be justified on the ground that the present system is vulnerable to excessive input tax invoicing and delayed refunds. Further, many of the SROs may be retained, despite the insistence of the Fund, under pressure from strong lobbies. 

The IMF has been accommodating and sympathetic in its Reviews and its Executive Board has granted waivers. It will be interesting to see how far the Fund will go to support the Budget of 2013-14, with a focus probably on home-grown measures to revive the economy and provide relief to the people. In the event there are problems in the relationship with the Fund, Pakistan can, of course, go back once again to the Eurobond market or seek more friendly gifts! 

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