New IMF Program By Dr. Ashfaque H.

Khan
Whenever a country faces a serious balance of payment crisis, it goes to the IMF to seek balance of payments support. While providing resources, tThe IMF, while providing resources asks the government to restore a balance between aggregate demand and aggregate supply by pursuing tight fiscal and monetary policy so as to curtail the former and implement growth-critical reforms to boast the latter. During October-November 2008, Pakistan went to the IMF for a bailout package and received heavy upfront payment to bolster foreign exchange reserves. Pakistan, on its part, failed to implement various economic reforms, particularly in the areas of resource mobilization, power sector and Public Sector Enterprises (PSEs). The IMF program got suspended in May 2010 and remained so until the expiry of the tenureor of the Program. As a result of reckless fiscal and inappropriate monetary policies pursued during the last five years, Pakistan has once again landed become embroiled in a serious debt repayment crisis. Those who negotiated with the IMF during October/November 2008 were inexperienced people, who never realized that the large sum the country wais borrowing from the IMF wouldill have to be repaid within couple of years. Today, the nation is paying a heavy price of for their mistakes. Uncertainty has surrounded Pakistan about its capacity to repay external debt obligations in the midst of rapidly declining foreign exchange reserves. Associated Press in its June 2, 2013 story (The NEWS) has already writtencommented that there have already been worrying signs in Islamabad, where commercial banks have begun telling customers trying to withdraw dollars that they are not available, or that they need to make a special request. While local and global investors are very upbeat on the prospects of the new government turning around the economy, they are watching Pakistan anxiously from the side l lines. They have huge investment plans to invest in in Pakistan but are waiting to see for the new government unfolding to unfold its medium-term (5 years) economic reform agenda and macroeconomic policies. While power sector crisis is consuming the bulk of the time of the new political leaderships time, perhaps little time has been devoted to yet another challenge, that is, thewhich is the task of making Pakistan solvent. It is an irony that those who played pivotal role in pushing Pakistan towards the verge of insolvency are now advising the new leadership to make Pakistan solvent. How to can they prevent Pakistan defaulting on its external debt payment obligations? There appears to be two schools of thoughts; one which argues that Pakistan should go to the IMF to prevent a full blown economic crisis and the other which argues that it can wait for the time being to seek IMF assistance. The proponent of the IMF program based their judgment on the fact that Pakistan has lost over $8 billion in its foreign exchange reserves over the last two years. Since the suspension of the IMF Program in May 2010, Pakistans external inflows have dried up. Pakistan has been making payments to its external creditors from its reserves and as such has continued to lose the same ever since. Pakistans foreign exchange reserved have declined to close to $6 billion, of 40 percent of which, 40 percent of these are borrowed from commercial banks in forward market. Any further decline in the State Bank of Pakistnas (SBP) reserves may force commercial banks not to roll over their lending to the SBP. Such a move could create a crisis of confidence and could plunge the country into deep crisis. Pakistan will have to make payment to the IMF on June 28 amounting $264 million. Furthermore, during July-December 2013 additional over $2.0 billion will have to be paid to the IMF alone. It is in this perspective that the proponents of the IMF Program are suggesting that Pakistan should negotiate a mediumterm program at its earliest to prevent a full-blown economic crisis.

Others argue that Pakistan should wait for four/five months, prepare its own home-grown reform agenda and then negotiate with the IMF for a new program. The proponents of this view believe that the new government will be able to secure alternative funding which can provide them some space to do their homework. This can be a good strategy but risky as well. Recent experience of Pakistan suggests that relying on uncertain flows have created serious budgetary as well as financing challenges. How credible is this alternative funding sources is not known, at least to me. Even if this source of funding is credible, it will simply postpone the inevitable and will not in any way help the government in negotiating a program. My suggestion is that an IMF mission is arriving in Pakistan on June 19 for Post-Program Monitoring. Pakistan may like to start a negotiation with them for a new program and seek a funding amounting to the remaining amount to be paid to the IMF. What could be the critical agenda of reform that the IMF would like to see Pakistan implementing in the medium-term? My experience and understanding suggests that there will be three critical areas where Pakistan will have to deliver resource mobilization, power sector reform and restructuring and privatization of public sector enterprises (PSEs). All these critical areas are part of the PML (N) manifesto. The PML (N) manifesto argues that all income irrespective of sources of generation should be brought under direct tax net. In other words, PML (N) believes in broadening of tax bases and taking tax-to-GDP ratio to 15 percent by the end of its tenure. This is exactly what the IMF may suggest the government to increase the tax-to-GDP ratio to 15 percent by broadening the tax bases. On power sector reform, the present government and its political leadership areis already working seriously even before taking charge of the state formally. The government has already prepared a wide-ranging short-tomedium power sector reform program which can form athe part of reform agenda for the IMF Program. This reform agenda includes shifting of gas from CNG to power sector through economic as well as administrative measures, improving the governance in utility companies by appointing professionals through open merit to run DISCOs, coming down hard on power theft, targeting power sector subsidies to deserving segments of society and augmenting power supplies to the system. On restructuring and privatization of rotten PSEs, the Prime Minister himself stated at the floor of National Assembly that a new management consisting of professional CEOs and independent board will be appointed with performance targets. Once the health of these PSEs is improved the government would consider privatizing them. These are positive steps in the right direction. These reform plans can form the reform agenda for the IMF Program. The government has already announced that it will not only promote austerity but also go for resource mobilization. It has also announced that it will strengthen tax authorities and bring in the right people for right jobs. I dont see any conflict between the would-be reform agenda under the IMF Program and the reforms listed in PML (N) manifesto as well as the statements of the PML (N) leadership. It is, therefore, suggested that Pakistan may start negotiating with the IMF for a new program. This will give confidence to both local and foreign investors to invest in Pakistan in a big way. It will be good for Pakistans economy as well as for the PML (N) leadership. The writer is Principal and Dean at NUST Business School (NBS) Islamabad. Email: ahkhan@nbs.edu.pk