Long past are the days when our financial pundits prematurely claimed to have broken the begging bowl of requiring International Monetary Fund (IMF) support. Due to lacklustre international support, the current democratic government was compelled to concede to stringent IMF conditionalites and secure $11.3 billion via a standby arrangement loan in order to keep the national economy afloat. The IMF funding was, however, terminated prematurely in 2011 on account of non-implementation of tax and fiscal reforms.
There is now widespread speculation that Islamabad is keen to seek another bailout from the IMF to support its weakening balance of payments position. Pakistan’s foreign exchange reserves have recently declined significantly. This is despite the release of the Coalition Support Funds (CSF) by the US and record level remittances, which have provided much-needed relief to our deteriorating balance of payments position.
With large international debt payments approaching, it is feared that the balance of payments position will deteriorate to precarious levels in the very near future.
Besides trying to secure IMF support itself, other multilateral lenders like the World Bank and the Asian Development Bank also need the IMF’s endorsement of Pakistan’s economic and fiscal policies before they renew their loan commitments to our government in order to keep our economy afloat.
However, given the lack of compliance to the earlier IMF programme, further lending cannot be secured without accepting harsh fiscal management conditions. With general elections approaching, the IMF is insisting on signing a new bailout programme, endorsed by all political parties in the country, so as to ensure that the incoming government continues to follow its advice.
The overarching stipulation set forth by the IMF programme for Pakistan would be reducing the budget deficit to three per cent of the gross domestic product (GDP) over the next three years, which otherwise is projected to be around six per cent of the GDP. Achieving this sort of fiscal discipline without further slashing public expenditures would be quite difficult.
According to newspaper reports citing anonymous sources, the IMF is trying to push Pakistan to improve tax-collection, hoping to raise it from the current level of around nine per cent of the GDP to over 13.5 per cent by end of the programme.
Trying to raise revenues by taxing citizens with the capacity to pay instead of relying on international borrowing, which is pushing our international debt to insurmountable levels, makes good sense and we should not need entities like the IMF to realise this fact. Moreover, entities like the IMF believe in trying to secure economic growth by providing incentives to big business and the already wealthy, which in turn, shifts the burden of revenue generation and fiscal discipline onto the common man.
The IMF also does not want to disturb Pakistan’s interest payments on outstanding international debts nor does it want to insist on curbing Pakistan’s defence spending so as not to jeopardise the geo-strategic situation in the region. Given that the White House is objecting to certification requirements, which the US Congress has sought to place on disbursements from the CSF, it would not be surprising to see the US exert pressure on the IMF to bail out Pakistan, once again, in order to facilitate its own exit from Afghanistan.
But if history is anything to go by, US support for Pakistan would dry up rather quickly once its own strategic objectives have been fulfilled. While IMF support may help Pakistan defer an economic crisis in the midst of a historic transfer of power from one democratically elected government to another, this support will not help lessen the increasing disparities within the country. In order to achieve the latter goal, our policymakers need to put in place more equitable economic policies, focused on structural economic reforms, and revisie policy priorities aiming to achieve macroeconomic stability from the bottom-up, rather than continuing to rely on top-down advice from international lending agencies.
Published in The Express Tribune, January 15th, 2013.