FOLLOWING the completion of the ninth-month Stand-By Arrangement (SBA), discussions are ongoing between Pakistan and the IMF for a successor programme. Given that Pakistan’s fiscal and external vulnerabilities remain high, another Extended Fund Facility (EFF) arrangement seems inevitable. The country also faces heightened risks of political instability.

IMF programmes result from a negotiation process between governments and IMF staff, producing an ‘adjustment programme’ of economic reforms or ‘conditionality’ that the borrowing government must undertake. Typically, the EFF is a ‘high conditionality’ programme with specific targets and policy measures. For any IMF programme to be effective, it must include policies and programmes that are genuinely owned by the borrowing country’s authorities. The success of such programmes depends on the quality of negotiations and a well-defined medium-term economic agenda that addresses the root causes of persistent economic problems, without alienating domestic interest groups.

The professional networks and ideological orientation of the IMF staff and borrowing governments, can significantly influence negotiation outcomes. The Fund staff wield significant auth­ority during negotiations. Professional networks, often based on similar academic and professional backgrounds, increase staff trust and form the political basis for power and influence. Cross-country research on IMF programmes shows that as ideological ties and similarity between the Fund and borrower country officials increase, IMF programmes become larger, with fewer binding conditions. This indicates that borrowing governments can influence negotiations through narrative strategies based on shared ideology.

Our experience with the IMF during the last EFF programme supports this notion. When Pakistan’s team at the finance ministry, the central bank, and IMF Executive Board included professionals with strong academic credentials and experience in multilateral institutions, the design and implementation of an extended arrangement and approval of eight reviews under the 2019-2023 EFF programme proceeded smoothly despite challenges. The country also received emergency financing support of $1.386 billion during the Covid-19 pandemic. However, after the departure of this team of professionals, the ninth review faced delays, and the programme remained incomplete for various reasons, including the stringency shown by the IMF staff and management.

The government must exercise caution while agreeing on the contours of the next IMF programme.

Given the capacity constraints currently faced by Pakistan’s team, it is likely that economic policymaking will be outsourced to the IMF. Pakist­ani authorities may then end up merely signing off on a ‘Letter of Intent’ and ‘Memorandum of Eco­nomic and Financial Policies’, crafted by Fu­­nd staff. Notwithstanding his vision and commitment, Finance Minister Muhammed Aurang­zeb needs a robust team of economists and professionals to negotiate effectively with the IMF.

Another critical aspect of negotiations involves agreement on key assumptions related to the forecasts of the exchange rate, inflation, GDP growth, and balance-of-payments as fiscal planning and monetary policy decisions depend on these variables.

Previously, projections by State Bank economists, based on advanced forecasting models, have proven more accurate than projections used by IMF teams. For instance, during the EFF programme negotiations in April-May 2019, the SBP accurately projected the dollar to rupee average exchange rate for FY20, following the transition to a market-determined exchange rate regime, to be around Rs162, whereas IMF projected it to be between Rs177 and Rs182 with a view to exerting harsh conditions on Pakistan. The actual exchange rate (Rs161.91) aligned with the SBP’s forecast. This difference between the SBP and IMF on such projections led to the departure of SBP governor Tariq Bajwa and finance secretary Younus Dagha from their offices, as they resisted the IMF-projected exchange rate and inflation numbers and associated policy prescriptions. History has proven that their stance was correct. Sadly, there is no accountability within the IMF for producing erroneous projections.

Another example is the FY24 current account deficit, which the IMF projected at $5.649bn at the start of the SBA programme, but revised to $3bn. Based on these inflated current account deficit estimates, the IMF had untenably asked Pakistani authorities to arrange for financing assurances to meet the full external financing needs for completing the ninth review. The off-the-mark current account deficit projections have vindicated the stance taken by then finance minister Ishaq Dar who had protested against IMF’s exaggerated projections to put undue pressure on Pakistan. Also, the SBP has consistently produced more robust and accurate inflation forecasts than the IMF.

That said, it is critical for the government to exercise caution while agreeing on the contours of the next IMF programme. These must include domestic resource mobilisation and expenditure efficiency, structural reforms to improve the business climate, solid measures to increase non-debt-creating external inflows, and solutions to address the root causes of long-standing energy problems. There must also be a commitment to implementing the agreed privatisation agenda to get rid of loss-making SOEs.

Further, tax reforms must focus on equity issues within the tax policy. To prevent social unrest, tax reforms should target raising revenues from untaxed and under-taxed sectors rather than squeezing existing taxpayers further. Tax credits should encourage business investments and private expenditure on education and health by individual taxpayers. Similarly, within the energy sector, previous IMF programmes failed to resolve the burgeoning circular debt through tariff increases and unjust fuel taxes alone. The circular debt swells due to inefficiency, theft and losses faced by power distribution firms. The new IMF programme must have realistic policies and targets, instead of relying on outdated structural conditionality, which has not yielded fruitful results, has alienated citizens, and stifled economic growth.

Pakistan’s initial experience under the 2019-2023 EFF programme underscores the importance of having a capable team that can negotiate effectively. Without such a team to formulate home-grown economic policies and get the IMF to agree to these, the country risks embarking on yet another programme like the previous 23.

The writer is a former senior adviser of the IMF and holds a PhD in economics from the University of Cambridge.

dr.saeedahmed1@hotmail.com

Published in Dawn, May 31st, 2024