Right time to engage IMF
WITH the domestic and foreign investment at a low ebb and capital inflows drying up owing to the global financial crisis and domestic uncertainties, some international lenders have given a ‘friendly advice’ to Pakistan to go for an immediate IMF programme before financial vulnerabilities weaken its negotiating capability.
Finance Minister Abdul Hafeez Shaikh and his colleagues in the finance ministry feeling comfortable in the short term, however, do not seem to be worried about too distant a future.
But this has more to do with their underlying weakness; they have not been able to push forward a reform agenda agreed to with the IMF or the so-called Friends of Democratic Pakistan a couple of years back. Nor have they been able to turn around bleeding public sector organisations or overcome an entrenched energy problem, resulting in a chronic circular debt crisis and a record 8.5 per cent fiscal deficit.
The overwhelming argument is that in the absence of an IMF programme, the major multilateral agencies like the World Bank and Asian Development Bank have squeezed their lending and restricted their operations to specific short- term project financing.
Friendly countries like Japan and China have their own geo-political limitations while traditional support from Saudi Arabia has almost come to an end following the PPP-led coalition government.
Economic managers, however, believe that about $2 billion worth of external inflows estimated in the budget, if materialised during the current financial year, would be sufficient to avert a balance of payment crisis, obviating the need for an IMF programme in the remaining six months of the current government. But these inflows premised on three avenues — $400 million coalition support fund from the United States, recovery of $800 million PTCL proceeds from Etisalat of the UAE and $800 million auction of 3G telecom licences — remain as uncertain now as they were during the last two financial years.
With the current foreign exchange reserves in excess of $15 billion, the economic managers estimate $2 billion budgeted inflows, after meeting imports and debt repayments through remittances and exports, would put total reserves at about $17 billion. After adjusting $4.6 billion or so of the current account deficit, they argue that Islamabad would be comfortable with a reserve position of around $13 billion on June 30, 2013.
In case, the CSF disbursements and the PTCL dues do not materialise for any reason or the process of 3G licences is taken up by the judiciary, the reserves would fall below $10 billion.
That would create for the economic managers compelling circumstances to accept non-traditional loans or tougher than usual IMF conditionalities for balance of payments support.
“The best time to negotiate an umbrella programme is when you have economic and financial strength and not when you are in panic and forced to compromise on national and political interests”, said a senior official at a lending agency.
The usual lending agencies operating in Pakistan are also specifically critical of the inaction of the political and economic leadership to revive coordinating forums like the Friends of Democratic Pakistan and Pakistan Development Forum — the later being held only once since 2007 and former held hostage to Pakistan-US political controversies. In the absence of such coordinating avenues, lenders and development partners lurch in vacuum, nowhere to raise complaints and concerns and pool their efforts and resources and nobody to explain, address and fight back.
Some lenders blame Pakistan managers for failing to reform its energy sector, push forward agreed water sector reforms and improve domestic resource mobilisation. For example, the US push for a gradual increase in water tariff as a precursor to finance $12 billion Diamer-Bhasha dam, the “highest priority project’ through a multi-donor support, has not moved an inch in more than two years.
As these forums became dead, Pakistan also could not effectively make its case on Bhasha dam or confront the World Bank for staying away despite a strong case as the World Bank’s Operational Policy on disputed territories (OP 7.60) did not require a ‘no objection certificate’ from India.
The WB’s operational policy required that in case India said in writing it has any objection to the project on the grounds that such a project would prejudice the outcome of the territorial dispute. If India raises objections in writing, the World Bank management should consider them and make an assessment about the merit of such objections.
In proceeding with such projects, the World Bank documents state that it does not intend to make any judgment on the legal or other status of territories concerned or to prejudice the final determination of the parties’ claims.
Friendly lenders believe even that India has secretly raised any objection which was not in their knowledge, then the “bank management has not followed its operational policy on disputed territories”, an issue that needs to be challenged in a professional manner. In fact, the Indus Waters Treaty of 1960 involving the World Bank, India and Pakistan required building new major dams every 10 years but none has been built in 50 years.
That is the cost of ignoring international institutional forums and a serious political, economic and foreign policy challenge.