Heading back to the IMF

ISLAMABAD: In the backdrop of macroeconomic instability, the writing on the wall is that Pakistan is left with no choice but to resort to the International Monetary Fund to seek fresh bailout package in 2013.

“There is no possibility of moratorium on [current] loan repayments,” said renowned economist Dr Meekal Ahmed. “People are being misled,” he added. “The loan has to be paid first, since the IMF is a preferred creditor.”

There is no likelihood of moratorium, firstly because the IMF, or even the World Bank, does not have rules to allow moratorium on loan repayments, and secondly exemption from the repayments even for a temporary period implies the loan’s default, which will have far reaching repercussions for the ailing economy of Pakistan.

Former Governor State Bank of Pakistan Dr Ishrat Husain also agreed that there would be no other option but to seek the IMF assistance, “if the government allowed running of economy on auto pilot mode”.

Absent adjustment, there will be a balance of payments crisis sometime in 2013, as reserves will go down, he added. “There is an option other than another IMF bailout. Are we helpless? We certainly behave as we are. But we are not.”

His advice is ‘adjust the macro policies’. “This would mean a tighter fiscal stance and maybe also a tighter monetary policy so that both work in tandem to dampen demand pressures. This will lead to a better balance of payments outcome and the reserve loss will abate,” he maintained. “Markets will be pleased and maybe we will get fresh capital inflows. The exchange rate will stabilise,” he said.

“And, then you have to address the structural problems that are also hurting the economy, energy sector, public enterprises, etc. It needs to be a package of reforms, which are well-sequenced. Half-measures will get you nowhere,” he concluded.

All-out economic crisis will start appearing in March 2013 when the PPP-led coalition government will complete its term and the interim set-up will take charge.

The debate is doing round in the concerned circles that if the new set-up would cajole $3 to $5 billion out of the Washington-based lender especially given that the interim government cannot guarantee compliance with the reforms associated with the new inflows in the post-election regime.

And, “the IMF will not be ready to dole money out in such a scenario without assurance from the US,” according to the analysts.

Pakistan has already crossed its designated loan quota from the IMF during the present government and its economy is under the Fund’s Post Programme Monitoring (PPM).

Pakistan has to undergo the special monitoring (PPM) for its availing maxium Fund’s resources. Primarily, the Stand-by Arrangement of $7.6 billion was agreed, but later it was revised up to $11.3 billion.

The lender’s outstanding credit to Pakistan has exceeded the 200 percent of quota threshold for the PPM, and there are no exceptional circumstances that would indicate that PPM is not warranted, stated an IMF’s report. In addition, Pakistan is an exceptional borrower from the Fund and, therefore, an Ex-Post Evaluation has already been done. “In accordance with the Fund’s policy, its managing director recommends the initiation of PPM,” said the sources.

Widening budget deficit and its financing remain major challenges for the country’s economy notwithstanding the buttress given by the coalition support fund. There is a shortfall in tax revenue, while burdensome subsidies to cash-bleeding power sector give a push to expenditures.

“So the budget deficit cannot be controlled less than 6.5 percent of GDP at any cost keeping in view reckless expenditures going on by the government with the objective to please voters,” said the official sources.

But, an independent economist Dr Ashfaque Hassan Khan believes that the budget deficit would be standing in the range of 8 to 8.5 percent of GDP by end June 2013.

Against budgeted amount of $1.5 billion in shape of CSF, Pakistan received around $1.8 billion, indicating that it received $300 million extra as non-tax revenue but there are major slippages expected on account of materialisation of much awaited auction of 3G, $800 million installment from Etisalat on account of PTCL privatisation’s proceeds, and $300 to $500 million as Eurobond during the current financial year.

The macroeconomic indicators remained weak during the tenure of the PPP-led regime.

The economic team managed to misguide the ruling PPP’s Chairman Bilawal Bhutto Zardari as he had claimed that their government brought down inflation from 25 percent to single digit at around 8 percent during his address at the public gathering during a death anniversary of Benazir Bhutto at Garhi Khuda Bakhsh on December 27.

As a matter of record, when the PPP regime took reins of power in March 2008 the inflation stood at 12 percent and the inflation would go back to the double digit in March 2013. The inflation had touched the figure of 25 percent in 2008-9 when the Pakistan Peoples’ Party was holding power in Islamabad.

Dr Husain said that there were two scenarios emerging on the economic horizon of the country.

After receiving $688 million under the coalition support fund, the exchange rate would stabilise and Pakistan might come in a position to pay back its loans, he said.

In other scenario, if the country’s exports and remittances increase by 10 percent each, it would fetch $4 billion precious foreign currency.

“There is another related point that in case of reduction in oil prices in international market the import bill would come down and savings be achieved,” he added.

He further said when he took over as governor State Bank of Pakistan in 1999-2000, the foreign currency reserves had nosedived to $300 million but they focused on governance that lifted foreign reserves up $16 billion.

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