THE IMF has recently issued yet another congratulatory review of Pakistan’s “performance” under the current Fund programme, the country’s twelfth since 1988. The statement issued after the sixth review informs us inter alia that “economic activity and the external position continue to improve”, “the authorities’ reform programme remains on track”, and that “fiscal performance has been generally good”.
The reality on the ground with regard to Pakistan’s economic situation, its business environment and the government’s performance can be gauged by the following facts:
Pakistan’s official foreign exchange reserves have increased from around $5 billion at the start of the current IMF programme in September 2013, to slightly over $11bn as of end February 2015. However, 72pc of this accumulation in Fx reserves has been via new loans and borrowing (including the Saudi ‘freebie’).
There is a near consensus that Pakistan will require another Fund loan within the next three to four years.
Even the lowered fiscal targets are being met by withholding tax refunds due to industry, or by increasing tax rates of existing payers, rather than through any meaningful measures to broaden the tax base. According to industry estimates, FBR is withholding income as well as sales tax refunds nationwide of close to Rs100bn to artificially boost its revenue collection performance. This is putting undue financial stress on formal businesses in the country.
Unable or unwilling to raise tax revenue from Pakistan’s non-tax paying elite, the Ministry of Finance is dipping into the accounts of large businesses. In a patently illegal move, it has demanded Rs50bn from fertiliser companies on account of the Gas Development Infrastructure Cess (GIDC) — even while a court stay order is in place.
In a move that reflects lack of prioritisation and strategic thought, the Ministry of Finance has stopped releases of even relatively small amounts, even where these are meant to honour sovereign obligations. The handling of the case of Tuwairqi Steel Mills, which required the release of a paltry Rs5bn, and its subsequent closure with the loss of 1,100 jobs (and the dent on Pakistan’s reputation as an investment destination) is a recent case in point.
The country’s exports continue to flounder. Following the finance minister’s disastrous decision to allow the rupee to revalue, exports have fallen for eight months out of 15, for an overall decline of 5pc for the current fiscal year. Excluding exports under GSP Plus, the export decline is much sharper at 9.7pc. The rupee has appreciated 19pc in real effective terms since December 2013.
Given the realities on the ground, there is a near consensus amongst independent commentators that, with the weak design of the current IMF programme and the government’s insipid performance with regard to structural reform, Pakistan will require another Fund loan within the next three to four years latest.
In this backdrop of abysmal economic management and the underlying situation, the IMF’s repeated endorsement of the government’s non-performance stands out starkly. By doing so, it is wilfully painting a wrong picture of the economic situation, while reducing the pressure on the government to introduce meaningful reforms. This is the exact opposite outcome of what an IMF programme should be designed to achieve.
Unfortunately, the IMF’s complicity in endorsing perpetual non-performance by different Pakistani governments is not new. In the Shaukat Aziz-Musharraf period, the Fund actively sought to overplay the then government’s performance and to downplay the build-up of macroeconomic risks. While the Fund staff had become increasingly concerned somewhere in the latter part of 2006, Fund management overrode the staff’s professional opinion in drafting country reports and communiqués. The reason? The IMF is too closely aligned with Washington’s foreign policy objectives, and Fund management did not want to jeopardise their own career advancement by refusing to play in the hands of the neo-cons who wanted to prop up the Musharraf government.
Perhaps recognising the failure of the Fund as well as the Pakistani government, the most recent statement by the IMF’s director of the Middle East and Central Asia department, another Pakistani, has used Fund-speak and coded language to hedge the Fund’s endorsements so far. After reiterating that “Pakistan’s economy is improving” and that “the authorities have made progress with consolidating macroeconomic stability, strengthening public finances, and re-building foreign exchange buffers”, tellingly, it goes on to state that “as a result, immediate crisis risks have greatly receded”. It then lists the areas where Pakistan needs to do more, such as broadening the tax base and “addressing long-standing imbalances in the energy sector”.
This statement is craftily drafted to have an implicit ‘we told you so’ just in case somebody questions the IMF on the unreliability of the professional judgment exhibited in all the previous statements on Pakistan. However, it strikes such a jarringly different note in a nuanced reading, that the obvious question raised is: we were previously told Pakistan’s performance with regards to reform was satisfactory, and now we are being told it has not done enough. Which one of the two is wrong?
As the case of Pakistan has repeatedly shown, the incentives of the IMF — and the World Bank and others — are not necessarily aligned with the best long-term interests of a borrowing country’s citizens. As with most programmes, the IMF seeks to stabilise the immediate situation, draw in money from other creditors, and safely pull out its resources. This short-term approach may work for the IMF’s shareholders, but it increases — rather than reduces — the vulnerability of borrowing countries.
Hence, it is imperative that there is an independent evaluation of the IMF programme for Pakistan, and that some form of accountability for officials in the Fund and other multilateral organisations, as well as senior officials of borrowing governments, is introduced.
The writer is a former economic adviser to government, and currently heads a macroeconomic consultancy based in Islamabad.
Published in Dawn, March 20th, 2015