Preparing for an IMF-free future
The media’s spotlight is firmly on Islamabad seeking a new loan from the International Monetary Fund for the last several months. The speculations that the government was about to apply for yet another IMF bailout gained greater currency after the arrival of the Fund officials here for an extensive post-programme review late last month.
The IMF programme remains talk of the town despite a clarification by Jeffrey Franks, the IMF mission chief to Pakistan, following the conclusion of the post-programme evaluation that Islamabad had not so far formally requested another loan.
Question is being raised if Pakistan can avoid knocking at the doors of the IMF and prevent recurrence of a balance-of-payments crisis threatening to pull down the economy every now and then? Everyone — from businesspeople to economists to decision-makers — believes that there is no escape from a new Fund loan — at least not until we put our own house order –, though many are expecting a bailout later rather than sooner.
While economist Hafiz Pasha feels that the deteriorating balance-of-payments position could force the government to look for Fund’s help some time during the first half of the next financial year, the country’s economic managers argue that a new ‘certificate of trust’ from the lender of the last resort is necessary to obtain ‘cash’ budgetary support from the other multilateral donors and attract foreign private investors.
“The government can make it to the next budget without the Fund. It will be difficult to avoid another bailout in the first half of the next fiscal year as the government has to make hefty payments of about $3.5bn to the creditors, which, in turn, will reduce the liquid foreign exchange reserves to import cover of around one month or so and put huge pressure on exchange rate,” Pasha argues. The net liquid reserves with the State Bank are already down to under $9bn and exchange rate inching to Rs100 a dollar. The IMF’s assessment that rupee is ‘overvalued’ isn’t helping the currency either.
Many businesspersons agree with him. “It is for the government to decide if and when it wants the Fund’s dollars. But I don’t think it (the government) has any choice left here. It has brought it upon itself and us all by pursuing anti-industry policies,” says chairman of the Chenab Group Mian Mohammad Latif.
But he warns that “the IMF will be running the show and not our policy-makers once the bailout is negotiated”.
The numbers released by the central bank for the first half of the current fiscal year to December show balance-of-payments deficit reducing to $541mn from $1.8bn a year ago and current account posting a modest surplus of $250mn or 0.2 per cent of GDP on transfer of coalition support fund (CSF) of close to $2bn by Washington.
Going forward, the current account is projected to post a deficit below one per cent of the size of the economy at the end of the current year.
Even the financing of this small current account deficit will be a challenge due to drying foreign official and private capital inflows and the delays in the auction of 3G telecom licences and recovery of the remaining PTCL privatisation proceeds.
Many businessmen blame the ‘wrong’ economic policies of the government for the situation that is forcing the country to look towards the IMF for another bailout. “Our economic managers have failed to deliver.
Had they pursued right set of policies to promote growth, we would have been much better off today,” says Mian Latif.
He points out that the economy is going under because no step has been taken in the last five years to plug energy shortages, improve security conditions and build economic infrastructure. “If we are coping with sluggish growth today it is because we did not follow the right set of policies needed to push industrial and agricultural growth,” he insists.
A leading name in the engineering sector Syed Nabeel Hashmi believes that if the economy hasn’t collapsed despite severe energy shortages and other problems it is because of its ‘inherent strengths’. “We can say goodbye to the IMF for good if we put our house in order: plug energy shortages, improve security, develop infrastructure, etc. The increase in the export of engineering goods to about $1.8bn in the span of just a few years from a mere $400-450mn shows that we have some non-conventional industries that can be used to substantially boost our exports and get over the balance-of-payments problem. If our industrial sector can perform despite energy shortages, imagine what can we do if we can operate our capacities to the optimal level,” he argues.
Hashmi is sorry to note that the government and its departments like the Trade Development Authority of Pakistan have done little to market the non-conventional exports. “No research has ever been carried out to diversify exports or markets and promote several ‘marginalised’ industrial sectors with potential for huge export. If we had done so, we would have been in quite a different situation today.
We can still manage to get ourselves out of the debt trap if we remove energy shortages for businesses and start trusting our industry.”
Garments exporter from Sialkot Ijaz Khokhar says the textile and clothing exports could be raised to $20bn in two years if the government ensures uninterrupted supplies of gas and electricity to it and successfully negotiates its entry into GSP plus scheme of the European Union.
“We have capacities to the tune of $4-5bn lying idle due to energy crunch — precisely the size of financial assistance we are looking for from
the IMF. The provision of gas and electricity can revive this capacity and boost exports to $18bn. The GSP+ status will generate another $2bn in our export revenues. So even if it is not possible to avoid the Fund, at least we can start preparing ourselves for an IMF-free future,” Khokhar argues.
Commentators are predicting a tougher economic adjustment programme in case the IMF agrees to bail the economy out. The IMF advisor himself has ruled out a new loan unless a broad and deep political consensus on broad-based financial and governance reforms is developed and ‘prior actions’ taken to implement them.
Development economist Naved Hamid contends: “Bailout or no bailout; we need to implement reforms if we want to grow and get out of the current morass. Until then we will be forced to look for rescue by multilateral creditors every now and then and accept their harsh conditions.”