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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 ofpayments support. While providing resources, the IMF asks the government to restore a balance betweenaggregate 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 heavyupfront payment to bolster foreign exchange reserves. Pakistan, on its part, failed to implement variouseconomic reforms, particularly in the areas of resource mobilisation, the power sector and public sectorenterprises (PSEs). The IMF programme got suspended in May 2010, and remained so until the expiry ofthe 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 withthe IMF during October and November 2008 were inexperienced people, who never realised that the largesum the country was borrowing from the IMF would have to be repaid within a couple of years. Today, thenation is paying a heavy price for their mistakes.Uncertainty has surrounded Pakistan about its capacity to repay external debt in the midst of rapidlydeclining 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 havebegun telling customers trying to withdraw dollars that they are not available, or that they need to make aspecial request.While local and global investors are very upbeat about the prospects of the new government turningaround the economy, they are watching us anxiously from the sidelines. They have huge plans to invest inPakistan but are waiting for the new government to unfold its medium-term (five years) economic reformagenda and macroeconomic policies.While the power sector crisis is consuming the bulk of the new political leaderships time, perhaps littletime has been devoted to yet another challenge the task of making Pakistan solvent. How can thegovernment prevent the country from defaulting on its external debt payment obligations? There appear tobe two schools of thought: one that argues that we should go to the IMF to prevent a full-blown economiccrisis and the other that says that we can wait for the time being to seek IMF assistance.he 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 borrowedfrom 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 acrisis of confidence and could plunge the country into deep crisis. Pakistan will have to make payment tothe 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 IMFalone. It is in this perspective that the proponents of the IMF programme are suggesting that Pakistanshould 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 reformagenda and then negotiate with the IMF for a new programme. The proponents of this view believe thatthe new government will be able to secure alternative funding, which can provide them some space to dotheir 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

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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 tothe 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 themedium-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 andprivatisation of public sector enterprises (PSEs). All these critical areas are part of the PML-N manifesto.he 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 tax-to-GDP ratio to 15 percent by the end of its tenure. This is exactly what the IMF may suggest thegovernment to do and may form part of the IMF programme.he 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-rangingshort-to-medium power sector reform programme, which can form a part of the reform agenda for the IMFprogramme.his 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 throughopen merit to run Discos, coming down hard on power theft, targeted power sector subsidies to deservingsegments of society and augmenting power supplies to the system.

On restructuring and privatisation of rotten PSEs, the prime minister himself stated at the NationalAssembly that a new management consisting of professional CEOs and independent boards would beappointed with performance targets. Once the health of these PSEs is improved, the government wouldconsider privatising them. These are positive steps in the right direction. These reform plans can form thereform agenda for the IMF programme.he 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 forthe right jobs. I dont see any conflict between the would-be reform agenda under the IMF programme andthe 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 willgive confidence to both local and foreign investors to invest in a big way. It will be good for the economyas well as for the PML-N leadership.he writer is principal and dean of NUST Business School, Islamabad. Email: ahkhan@nbs.edu.pk

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