Pakistan and the International Monetary Fund (IMF) reached an agreement for a US $5.3 billion loan under a three-year programme aimed at providing the government the budgetary support needed to hopefully boost growth, rebuild country’s foreign exchange reserves and tackle the energy crisis. Essentially, it means that the tranches of this new loan will be disbursed in a manner that would allow Pakistan to return earlier loans obtained from the IMF in a timely fashion. The loan will be an ‘extended fund facility’, which will carry a floating interest rate — currently at 3% — and a repayment period of 10 years, including a four-year grace period. If all goes to plan this extended facility should allow Pakistan additional fiscal space without significantly adding to its external debt through basically restructuring of its existing IMF loan over 10 years coupled with a four year moratorium during which the government need not worry about servicing of this debt. In short the facility in a way will allow the new government the much needed breathing space to embark on some of its election time promises aimed at bringing growth, employment and prosperity to Pakistan.
However, one understands that this facility comes with a few strings attached! Before a formal loan approval by the IMF Board, Pakistan will have to take fiscal actions, announce an energy plan that is acceptable to the lenders, reverse the present monetary policy direction, commit to restrain provincial expenditures via centre’s oversight and re-set the budget deficit (2013-14) further down to 6%. Well, so much for looking the IMF in the eye, not taking a dictation and to only accept financing based on our own home grown recipe? Anyway, these conditions are tough asks and will require some deft handling to avoid political destabilisation and compromising national harmony —post-18th amendment, reigning in the provinces (especially the ones where the PML-N is not in government) using Islamabad’s whip is not going to be easy. Further, considering that the country closed the last fiscal year at a deficit of 9% of GDP or Rupees 2.1 trillion, a fiscal adjustment of 3% in one year seems next to impossible. On the flip side some of the measures being pinned on IMF shoulders could very well be the ones which actually represent the government’s own secret wish list? The excuse of ‘IMF loan conditional ties’ now provides them with the perfect cover to implement endeavours, which otherwise could have been termed (by some) as being controversial! For example, a case is already being built up that in order to keep to loan commitments the government will have little option but to quickly privatise some of the big public sector enterprises (PSEs). Now without even going into the merits and de-merits of privatisation in a country/economy such as ours and that too doing it ‘quickly’, what one fears is that like in the 90s, if such an aggressive throw away auction exercise is once again staged without first disclosing a transparent strategy, it will completely ruin the credibility of this government from the very onset of its current tenure. As it is, the lack of clarity on a transparent procedure in appointing new PSE Boards and Chief Executive Officers (CEO), absence of a clear future management mandate/direction for these new appointees (meaning their job is to resurrect the institution or to prepare it for the altar), and a general disregard on respecting the spirit of avoiding ‘conflict of interest’, are all factors in raising serious questions about the competence of the government in providing good corporate governance.
The economic world has gone through a paradigm shift in the last five years where sensitive actions involving the state silver and public ownership issues now need to be thought through very carefully before implementing — the government of Greece found this out the hard way by miscalculating their action of closing down of the ERT, Greece’s state television and radio network.
Coming back to the loan package, one cannot grudge the IMF for imposing these rather tough conditions. After all at the end of the day they have money to recover and Pakistan’s track record in this regard is far from being satisfactory — time and again we have failed to come good on our commitments. Also, they maintain that fiscal discipline never hurts anyone! The real issue though lies in determining what is really good for us and what is not. And the answer invariably comes out different when looked through our eyes as against when seeing through the prism of the IMF. When implementing IMF conditions, the two main challenges that confront an economy like ours pertain to a) inflation and b) pressure on the local currency. With subsidies on energy withdrawn and a devalued Pak Rupee the natural short-term outcome would be an up-surge in inflation amidst an environment of low growth and inadequate employment generation; thus an increase in the misery of the common man and in turn a high risk of possible social unrest. Also, a devalued Pak Rupee in our present context tends to be an undesirable option since, a) our exports’ history has shown little elasticity to currency devaluations, b) a large portion of our debt is external (meaning in foreign currency) in nature and a devalued Pak Rupee means an increase in our debt burden, c) domestic savings invariably come under pressure every time a currency devaluation takes place, d) with a significant technology gap between local and foreign machinery manufacturers, currency devaluation in effect carries a negative trend on the quality of capital investment, i.e. the type required to build factories and to buy cutting-edge machinery to maintain global competitiveness, and last but not least e) with global oil prices firming up again and winter being round the corner an erosion in the value of the Pak Rupee can be disastrous for our current account deficit.
The loan in itself is by no means a bad thing because to grow one needs capital and to raise capital one needs financing. The important thing is to use the amount borrowed productively. Our own story over the last 60 years and that of Greece, Italy and Ireland recently tells us that how ill conceived borrowings and non-prudent spending can quickly run a country’s economy to the ground. While governments of the day may have to leave the scene in consequence of unsustainable national debt burdens, the public is held accountable till the debt is cleared. And for this purpose there is this fast evolving thinking that perhaps the ownership of managing (borrowing, spending and servicing) national debt should be more widely spread. I am not sure that whether or not a recent proposal to get the IMF loan facility passed through the parliament was merely a political pot shot, but on a more serious note the government will do well by first sharing this responsibility with all stakeholders in the assembly and then forming a professional overseeing body (free of political and bureaucratic meddling) to manage national debt on an on-going basis!