GIVEN the current global financial woes and past Pakistani experiences, both the IMF and Islamabad seem to have arrived at a better understanding of the country’s ground realities. With reservations aside, one indication is the Fund’s continuing appreciation of the positive developments in the economy under its loan programme.

This signals that as long as the easier-to-introduce ‘reforms’ are moving in the right direction, waivers would not be denied by the Fund in difficult or time consuming cases. An impression is gaining ground that there is a greater exercise of patience in granting waivers now than in the past.

And while hiccups do occur, inducing the IMF to insist on prior actions by Islamabad, but they have not created a roadblock so far. On the other hand, even creative accounting is overlooked when things are considered to be generally moving according to the charted course.

Walking away when disappointed and then returning more frequently has not turned out to be the best policy for the IMF, nor has it helped Islamabad to tenaciously overcome domestic resistance to reforms

Implicit in the waivers is that the time and the sequence of the difficult-to-implement programmes will be determined not by rigid schedules but by the domestic business and institutional environment: how effectively can the government tackle the institutional resistance or the adverse response of the national economic agents.

Despite the many fault lines in the economy, the market has acquired enough muscle to resist moves that are seen hostile to its immediate interests. And the government cannot afford to upset the apple cart when the private sector has been sanctified as the engine of economic growth. So reforms can be delayed for more opportune time.

Meanwhile, the search for new approaches to tackle sensitive issues continues, like the imposition of the withholding tax on all bank transactions in case of non-filers.

Though the IMF had in the past more often than not ended its programme when it was frustrated with the lack of visible progress on what it considered critical reforms, this repeated exercise did not serve any useful purpose. For example, the issue of the autonomy of the State Bank of Pakistan has for long remained on the agenda of successive governments, with no outcome.

Now, the National Standing Committee for Finance has been activated. On August 9 (a Sunday), the committee approved the setting up of an independent committee to frame monetary policy.

Press reports indicate that the move would help meet a prior IMF condition for Pakistan to qualify for the next instalment of the current credit facility. The move follows the two waivers given by the IMF in its latest review for missed targets of the fiscal deficit and the ceiling on the SBP’s borrowings.

Here is a big question mark: will it deter government borrowings from the central bank or commercial banks unless a low fiscal deficit is sustained over a long period of time. The record shows that 60pc of foreign loans — amounting to $50bn — received during 2005 to 2015 was used for budgetary support.

The going is tough both for the IMF and the country’s economic managers. Direct taxes on incomes are being increasingly raised through withholding taxes or levies on bank transactions for non-filers, to improve documentation.

The consumers are paying the price of the inefficiency of grossly mismanaged utility companies. Extractive institutions defy all efforts aimed at improved governance, as indicated by the circular debt. The Federal Board of Revenue collects a mere 15pc of the overall tax revenue and the rest through banks and businesses.

The best bargain the IMF has got is that Pakistan has never defaulted on its foreign loans (though some of the non-IFI loans were rescheduled). Yet, a sizable chunk of the current IMF credit facility has gone into repaying the old debt owed to the Fund.

After all, the IMF’s primary mandate is to ensure global financial stability — a responsibility that has been put to severe test in the global financial turmoil since 2008, and, more importantly, sparked by a dominating debt culture. It has increasingly brought the Fund’s conventional wisdom and its prescriptions into question.

Meanwhile, walking away when disappointed and then returning more frequently has not turned out to be the best policy for the IMF nor has it has helped Islamabad to tenaciously overcome the domestic resistance to reforms: walking away when disappointed and then returning more frequently has not turned out to be the best policy for the IMF, nor has it has helped Islamabad to tenaciously overcome domestic resistance to reforms.

The IMF may soon discover, if it has not done already, that an agreed programme could be more efficiently implemented by the joint wisdom and efforts of the borrower and the lender, with policy and benchmark adjustments made when required. And after all, the best policy is one that does not defy implementation.

One may look at the privatisation process. In its initial phases, lucrative state enterprises were sold off easily, though not in the most prudent manner. And currently, the sale of giant sick units like Pakistan Steel and the PIA is difficult when both fore­ign and domestic investment levels are sluggish.

And in the case of sale of major enterprises, the privatisation policy may be revisited in light of the experience with KESC’s after-sale performance. Will the buyer have the will and the capacity to manage huge investments required to make an ailing unit robust, or will the new manager lean on the government for support in case of a public-private partnership?

One of the key issues facing Pakistan is the nature of its foreign dependence. During President Ayub’s development decade, Islamabad borrowed for social-economic development. Now, apart from budgetary props, it also needs balance of payments support, which, according to press reports, consumes one-third of foreign aid and loans.

The worst of it all is that the country borrows to repay its old debts, indicating that the loans and grants are not being productively used to generate enough earnings to service debts. The exports are stagnant and are not likely to pick up fast in the current international trade environment, leaving an effective import-substitution effort the only option for the time being.

It cannot be denied that the Fund’s ‘bailouts’ have temporarily improved the external sector’s performance. Pakistan has built a comfortable level of foreign exchange reserves and improved its debt-repaying capacity. How this has been managed is a different issue.

Published in Dawn, Economic & Business, August 17th, 2015

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