Vagaries of Consciousness
- More sensible than friendly fiscal support?
In a startling development, IMF Mission returned to Washington without agreeing to a new program with Pakistan. On many occasions in the past, IMF-Pakistan talks have failed but they were invariably related to reviving an already stalled program or failing to complete a Review under the program. There is, therefore, no previous example for a program mission not to have concluded an agreement.
Let’s attempt to find out what could have led to the break-dawn of talks. At the very outset, we feel that IMF has not been given the kind of importance and respect it deserves. Caretakers invited them twice and nothing came out of the work they did. Initially they suggested that they would open talks with IMF but were frightened by the response of some opposition leaders who warned them that they were not authorised under the Election Act 2017 to engage in any such business. A subsequent effort at the close of the term was not responded positively by the Fund.
The new government stood a great chance to strike a good deal with the Fund at fairly favourable terms and with speed. They would have laid, justifiably, every blame for the miserable state of the economy on their predecessors – a story that would have resonated with the Fund officials also as they had first-hand experience of how remorselessly the previous government squandered gains from a successful soon after its completion. But either for lack of experience or not appreciating the gravity of the challenge, the new government became complacent. For them, their election rhetoric became a strategy for their economic roadmap. For them IMF was not the preferred option nor was it the only option.
Another refrain from the PTI’s past was quite distracting: debts were bad as well as the CPEC. Besides, it was surmised that the IMF and other IFIs were complicit in promoting debt creation and, consequently, promoting external dependence that impinges on country’s sovereignty. Another spin made corruption the primary reason behind rising debts that on lined corrupt politicians’ pockets since the money was siphoned off and proceeds of crimes were laundered and remitted outside Pakistan leading to the dependence on foreign lenders. The recipe of reform that flows from this narrative is to recover the looted wealth from the offenders through accountability and fill the depleted coffers of the country, otherwise the country would have to go to the IMF and thereby unleash inflation. Another possibility was to ask the friends of Pakistan to deposit some dollars in country’s central bank for some time during which we would put our house in order.
It was such kind of reasoning that persuaded PTI government not to go to the Fund immediately, a decision the time would prove was misconceived. The Caretakers, having shown an inability to go to the Fund, had thought it fit to make two large exchange rate adjustments adding to Rs13 per dollar and a policy rate adjustment of 100 bps. Unfortunately, this pattern was followed by the new government as it presented a mini-budget, increased policy rate by 100 bps and shaved off another Rs10 from the exchange rate. Furthermore, they also made partial adjustments in gas, electricity and petroleum prices relative to what was awarded or recommended by the regulators. All this was thought to be reforms but amounted to nothing more than a patch work. If it was considered a sufficient and coherent response to the problems country was facing the same should have produced some positive results. But none of these measures have led to the kind of turnaround that a new government badly needed to establish its credentials for economic management. On the contrary, all leading indicators such as reserves, fiscal deficit, borrowings from SBP, policy and exchange rates stability, stock market showed manifest deterioration. This would also not prove sufficient during talks with the Fund.
The PM narrated that debt, corruption, loot and plunder and empty coffers are pieces of a strand that afflicts our economy
It was not a slip-up, but a deliberate strategy to avoid IMF, which was unequivocally articulated by none other than the prime minister himself. The press conference he held on 7th October 2018, in Lahore, betrayed this fallacious thinking. He has been grossly misled either by his advisors or his own understanding of the economic challenges. The PM narrated that debt, corruption, loot and plunder and empty coffers are pieces of a strand that afflicts our economy. And that only by recovering the looted wealth would the coffers of the country be filled, for which he has started gathering the necessary data and he himself was supervising the work in his office. He would avoid going to IMF as much as possible.
The following day, on 8th October, the stock market tanked. The rupee came under pressure. A melt-down was imminent. The finance minister, who had already received the report of an IMF mission invited for an assessment about the state of the economy, collected a battery of economists and rushed to the PM Office for an emergency audience, where all of them pleaded with the PM with an utmost sense of urgency, and recommended that there was no room left for continuing with the uncertainty about what we need to do. The government has to seek Fund’s assistance. In the wee hours of 8th October, FM recorded a video message announcing that the government has decided to request IMF for a new program.
It was nearly a month-long wait before the Mission arrived. The duration of the mission was 7-20 November. It was an abortive mission as it didn’t lead to a new program. Details are not available why it was not successful. Talks fail when conditions regarding performance criteria (fiscal deficit, reserves, etc) are not agreed. It is primarily the fiscal deficit and the manner of its reduction that is often the reason. Be it raising of taxes, cutting of expenditure or raising prices of gas and electricity, not reaching an agreement simply means the conditions were considered politically unpalatable. On the last day of the Mission, 20 November, the two sides issued terse statements saying the talks were constructive and would continue in the future.
The hasty conclusion of talks without a positive outcome, some writers believe, is due to assurances the PTI leadership has received from these countries about a bail-out package. This is not a happy occasion. If one has to endure pain under a Fund program, how someone else could volunteer to alleviate it without seeking some compensation, even though it may not be fully known to the public. Why should Pakistan take a support of this nature. It doesn’t solve our problems. More importantly, such dependence would undermine the credibility and competence of the PTI government, as it would be perceived unable to face difficult economic problems it has inherited, and it would be accused of attempting to stay clear of troubles during its time in office. This would be a defeatist approach unworthy of adoption at the outset of a five-year term.
More importantly, the government should take economic stability as more important than political palatability. The view that the government had done enough already, and was not ready to take further actions, should give way to the realisation that almost all the required adjustment is due to the failure of the previous government in the last two year and therefore the nation has to endure the cost of clean-up. If it is not done today it would have to be done tomorrow, albeit at a much high cost.
If the talks are stalled, they must be resumed and a program reached with the Fund. Labouring under a Fund program is far more durable and honourable then looking for friendly support.