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THE government now finds itself at the crossroads and whatever path it chooses, it will likely create history. The crossroads has been reached by the resumption of the IMF programme, and the choice the government faces is whether to proceed down the path of deficit reduction as committed to the Fund or chart a course with the coming elections in mind. The two cannot go hand in hand for very long because the first involves tightening the belt and the latter involves increased spending, so a choice has to be made.
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If they choose to stick to the commitments that former finance minister Hafeez Sheikh gave to the IMF that won approval from the IMF board on March 24, they will have to sharply curb spending, raise power tariffs and fuel prices, increase taxes and roll back the many supports they have been providing to industry ever since the Covid crisis, supports that people in industry have grown accustomed to.
The prime minister has been coming under increasing pressure from within his own party to allow greater spending by his MNAs in their constituencies to help shore up their electoral prospects in the forthcoming elections. In order to be ready to face their constituents and voters in 2023 — a reality they will face less than two years from now — they argue they need to start spending on uplift schemes and projects immediately. Thus far Hafeez Sheikh kept a tight lid on these expenditures, making him a deeply unpopular figure within his own party. He was more mindful of his commitments to his creditors than he was to the demands of his party MNAs.
Increasingly now, signs are suggesting that the government intends to try and renegotiate the terms of the Fund programme.
Increasingly now, signs are suggesting that the government intends to try and renegotiate the terms of the Fund programme that Sheikh signed. It is difficult to imagine how this can be done though, given the board approved the commitments and the first tranche of $500 million against that approval has already been issued. Hammad Azhar has said in his maiden press conference that the Fund agreement can be “reviewed” while Imran Khan said, at the launch of a UN report on Tuesday, that he will seek a “second package” from the IMF.
It is unclear what exactly these words mean. Is Hammad talking about the routine reviews that all IMF programmes undergo as they are implemented? Or does he want a ‘review’ of the commitments before embarking on implementation? And by ‘second package’ is Khan referring to another set of commitments under the existing programme? Or does he intend to ask for another loan like the one they got last April when the Covid lockdowns began, the $1.4 billion from the Rapid Financing Facility that came without any strings attached?
Either way it will be a big feat if they succeed in persuading the Fund to change the targets envisaged in the commitments given by Sheikh to the IMF before his departure. I don’t recall another time when the targets of a Fund programme were renegotiated so soon after board’s approval and disbursement of the tranche.
If they stick with the commitments they will make history by being the first government in at least a quarter century, if not longer, to undertake an IMF-mandated adjustment twice in one term. All preceding governments have followed the same course: they come into power, find the foreign exchange reserves depleted, approach the IMF for emergency support, implement a painful adjustment for one or two years (sometimes even three), build up the reserves and fiscal space, then switch to election mode and spend heavily to try and shore up their electoral prospects, a move that again depletes the reserves and runs up the deficits.
No government has managed to win re-election for the past three decades at least, which means every government ends up leaving behind a depleted treasury and large deficits for its successor who then walks down the same path. We have seen this story repeated since at least 1988, when our story of eternal return to the IMF began. What we have never seen, however, is a government undertake an adjustment twice, and least of all, embark upon an adjustment precisely when the shadow of the forthcoming elections starts to loom.
It is of little surprise that they have cold feet about implementing the commitments given to the IMF by Sheikh. We don’t know what those commitments are because the Fund had not, till the time of writing this, released the programme documents. The standard practice is for these documents to be released within a couple of days following the board’s approval. But more than 10 working days have elapsed since the board’s approval on March 24 and there is still no sign of them so far. The IMF says their operation has slowed due to Covid-19, and workload ramped up due to the spring meetings underway in D.C., but those began on April 5, more than seven working days after the board’s approval. The delay in making the programme documents public is puzzling, to say the least.
On the other hand, if the government decides to ‘renegotiate’ these commitments, it runs the risk of setting the stage for another balance-of-payments crisis within a year or two. Already the fiscal deficit is set to come in at higher than 7pc, and the trade deficit is growing faster than the exports and remittances on a monthly basis. If they decide to pump growth in the forthcoming budget, as Hammad Azhar has tweeted they plan to do, it will accelerate this and give rise to fresh deficits all over again. In that case this government could make history by being the first government ever to face two balance-of-payments crises in a single term.
It is not an enviable crossroads they are standing at right now, and how things go with the IMF are critical to how the political scene will evolve.
The writer is a business and economy journalist.
Published in Dawn, April 8th, 2021
