Pakistan is at the door step of the IMF once again. In a recent meeting between Finance Minister Ishaq Dar and the IMF held in Dubai, the fund has agreed to release a loan amount of $518 million by the end of March this year. This disbursement is part of a three-year $6.6 billion Extended Fund Facility (EEF) program.
The IMF mission led by Jeffery Franks visited Dubai from January 26 to February 5 this year to conduct discussions on the sixth review of Pakistan’s three year program. The latest lease of life provided by the IMF is a 36 month extended arrangement and was approved by the IMF board on September 4, 2013. The ruling political party wasted little time in turning to the fund soon after it formed the government in June 2013. Like all preceding governments, the incumbent administration assured the IMF that Pakistan’s economy is heading in the right direction. In a press conference held in Dubai earlier this month, Dar reportedly said that “the government has achieved all major economic targets and benchmarks”.
The latest loan agreement took place because Pakistan was found in a precarious economic situation in the aftermath of the last general elections. Pakistan’s central bank foreign reserves at the time had been falling and the chronic fiscal deficit had been widening. Sky rocketing inflation and major structural impediments had stalled economic growth. In addition to these bottlenecks, Pakistan does not have good sources of financial inflows from the international markets, courtesy its image of being a breeding ground for terrorism. The ongoing security concerns have more or less kept potential international investors at bay.
The primary aim of the IMF program is to achieve macroeconomic stabilization. This means bringing down the budget deficit and improving the balance of payments. This requires a tightening of both monetary and fiscal strategies of the country. The program quite ambitiously aims to bring down the budget deficit of the country from 8.5% of GDP in fiscal year 2012 to 3.4% of GDP by the end of the program. To achieve that goal, the administration must substantially reduce tax loopholes and exemptions, broaden the tax base and reduce tax evasion.
The axe to an extent will also fall on the development expenditure. The IMF did acknowledge that Pakistan’s growth will slip in the first couple of years of the program before showing vague improvements in its final year of implementation. The program remained tight lipped on the prospects of the poor, who most analysts believe are hardly in the equation during the implementation of these IMF programs. As Canadian economist Kari Polanyi puts it, “IMF programs are not designed to increase the welfare of the population. The fund is the ultimate guardian of the interests of capitalists and bankers doing international business”.
Macroeconomic weaknesses and longstanding structural imbalances have prevented full realization of Pakistan’s growth potential. Pakistan’s failure to deal with its energy crisis has been straining its fiscal balance sheet. A choked energy sector, combined with mounting security concerns has undermined Pakistan’s growth profile over the past decade. As a result, GDP growth has only averaged 3 percent over the past few years, well below what is needed to provide jobs for the rising labor force and to reduce poverty. With the population still increasing rapidly, Pakistan’s per capita income growth has lagged behind many middle income economies. The fiscal deficit has been widening at an alarming rate, mostly driven by poor tax collections, unmerited energy sector subsidies, and increased provincial government spending. The external position has significantly worsened, whereas central bank reserves have declined to critical levels. However in response to the latest IMF deal, the incumbent administration was quick to tighten its grips on the monetary policy. As per the latest State Bank of Pakistan quarterly report, Pakistan’s central bank had raised its interest rates to 10% at the start of last year. Global developments in the oil markets however have provided some relief as the State Bank last month decided to slash the interest rate to 8.5%. The recent fuel crisis and intermittent load shedding, only proves that the government is clearly not on course to address all the challenges highlighted by the IMF. Tax collections despite some improvements remain a worry. Yet still, we see the IMF mission quite adamant on supporting the implementation of the program. The success of the recent sixth review in Dubai only goes to show that the IMF does not want to lose a longstanding customer in Pakistan. This could also be because the IMF feels that a sharp drop in the international oil prices, presents Pakistan with a historic opportunity to reduce the vulnerability of the economy by building stronger fiscal and external buffers.
Successive governments in Pakistan have been blamed for embracing the structural adjustment programs of the fund, thereby allowing a hike in interest rates, and a contraction in both fiscal and monetary policies. In the past, such a stance by the government has completely arrested the flow of economic activity in the short to medium run. In the case of many other low-income countries, a removal in subsidies has completely shattered the social safety net of the population and has made them more vulnerable. Given Pakistan’s macroeconomic vulnerability, the government was left with little option but to turn to the fund for short term stability in the local markets. Nevertheless, the fact that Pakistan has become a frequent IMF client is a case for concern. The only way out is a committed government vowing to achieve fiscal discipline through the expansion of the tax base, reduction of unmerited power sector subsidies and reversing the balance of payments position. In a low investment climate such as Pakistan, interest rates must be maneuvered in a way to promote long term investment activity. Nawaz Sharif’s camp must commit themselves not only for the sake of Pakistan but also for their own political future. Donning the IMF cap has always been a political suicide for many middle income governments. Sadly, Pakistan has become IMF’s most trusted customer.
The writer is a development economist and alumni of Cambridge University
The IMF mission led by Jeffery Franks visited Dubai from January 26 to February 5 this year to conduct discussions on the sixth review of Pakistan’s three year program. The latest lease of life provided by the IMF is a 36 month extended arrangement and was approved by the IMF board on September 4, 2013. The ruling political party wasted little time in turning to the fund soon after it formed the government in June 2013. Like all preceding governments, the incumbent administration assured the IMF that Pakistan’s economy is heading in the right direction. In a press conference held in Dubai earlier this month, Dar reportedly said that “the government has achieved all major economic targets and benchmarks”.
The latest loan agreement took place because Pakistan was found in a precarious economic situation in the aftermath of the last general elections. Pakistan’s central bank foreign reserves at the time had been falling and the chronic fiscal deficit had been widening. Sky rocketing inflation and major structural impediments had stalled economic growth. In addition to these bottlenecks, Pakistan does not have good sources of financial inflows from the international markets, courtesy its image of being a breeding ground for terrorism. The ongoing security concerns have more or less kept potential international investors at bay.
The primary aim of the IMF program is to achieve macroeconomic stabilization. This means bringing down the budget deficit and improving the balance of payments. This requires a tightening of both monetary and fiscal strategies of the country. The program quite ambitiously aims to bring down the budget deficit of the country from 8.5% of GDP in fiscal year 2012 to 3.4% of GDP by the end of the program. To achieve that goal, the administration must substantially reduce tax loopholes and exemptions, broaden the tax base and reduce tax evasion.
Interest rates must be maneuvered to promote long term investment
The axe to an extent will also fall on the development expenditure. The IMF did acknowledge that Pakistan’s growth will slip in the first couple of years of the program before showing vague improvements in its final year of implementation. The program remained tight lipped on the prospects of the poor, who most analysts believe are hardly in the equation during the implementation of these IMF programs. As Canadian economist Kari Polanyi puts it, “IMF programs are not designed to increase the welfare of the population. The fund is the ultimate guardian of the interests of capitalists and bankers doing international business”.
Macroeconomic weaknesses and longstanding structural imbalances have prevented full realization of Pakistan’s growth potential. Pakistan’s failure to deal with its energy crisis has been straining its fiscal balance sheet. A choked energy sector, combined with mounting security concerns has undermined Pakistan’s growth profile over the past decade. As a result, GDP growth has only averaged 3 percent over the past few years, well below what is needed to provide jobs for the rising labor force and to reduce poverty. With the population still increasing rapidly, Pakistan’s per capita income growth has lagged behind many middle income economies. The fiscal deficit has been widening at an alarming rate, mostly driven by poor tax collections, unmerited energy sector subsidies, and increased provincial government spending. The external position has significantly worsened, whereas central bank reserves have declined to critical levels. However in response to the latest IMF deal, the incumbent administration was quick to tighten its grips on the monetary policy. As per the latest State Bank of Pakistan quarterly report, Pakistan’s central bank had raised its interest rates to 10% at the start of last year. Global developments in the oil markets however have provided some relief as the State Bank last month decided to slash the interest rate to 8.5%. The recent fuel crisis and intermittent load shedding, only proves that the government is clearly not on course to address all the challenges highlighted by the IMF. Tax collections despite some improvements remain a worry. Yet still, we see the IMF mission quite adamant on supporting the implementation of the program. The success of the recent sixth review in Dubai only goes to show that the IMF does not want to lose a longstanding customer in Pakistan. This could also be because the IMF feels that a sharp drop in the international oil prices, presents Pakistan with a historic opportunity to reduce the vulnerability of the economy by building stronger fiscal and external buffers.
Successive governments in Pakistan have been blamed for embracing the structural adjustment programs of the fund, thereby allowing a hike in interest rates, and a contraction in both fiscal and monetary policies. In the past, such a stance by the government has completely arrested the flow of economic activity in the short to medium run. In the case of many other low-income countries, a removal in subsidies has completely shattered the social safety net of the population and has made them more vulnerable. Given Pakistan’s macroeconomic vulnerability, the government was left with little option but to turn to the fund for short term stability in the local markets. Nevertheless, the fact that Pakistan has become a frequent IMF client is a case for concern. The only way out is a committed government vowing to achieve fiscal discipline through the expansion of the tax base, reduction of unmerited power sector subsidies and reversing the balance of payments position. In a low investment climate such as Pakistan, interest rates must be maneuvered in a way to promote long term investment activity. Nawaz Sharif’s camp must commit themselves not only for the sake of Pakistan but also for their own political future. Donning the IMF cap has always been a political suicide for many middle income governments. Sadly, Pakistan has become IMF’s most trusted customer.
The writer is a development economist and alumni of Cambridge University