M Ziauddin
Pakistan would need an IMF programme even if we get hefty bailout packages from friendly countries because without a Fund deal we would not be able to improve our credit rating in global markets, or engage with other multilateral lenders, and also would not be able to sell our bonds at an affordable mark-up in the international market.
And the IMF is not expected to budge an inch from its ‘one-size-fit-all’ formula of conditionalities that usually accompany its programmes no matter how small in terms of amount and short in terms of period.
As former finance minister Dr Hafiz Pasha told Business Recorder on Saturday (Pasha speaks about likely IMF approach to economy - published on Sunday, Nov.4, 2018) discussions with the Fund mission during their scheduled visit starting Nov. 7 are not going to be easy because in his opinion ‘thrust of the mission would be on stabilization of economy against growing challenges of budget and current account deficit’.
Dr Pasha has also expressed his disappointment over the serious shortfall in tax collection in the first quarter, slow growth in export and sustained increases in import growth and at the same time he feared that despite further curtailment in development budget it would be extremely difficult to limit the budgetary deficit to 5 per cent, one of the conditionalities he expects the Fund would impose if it agreed to approve a structural reform programme for Pakistan.
Since price hikes across the board, increase in users’ charges and withdrawal of subsidies affect the poorer voiceless masses, successive governments in the past had felt no qualms in implementing these at the earliest to ensure early release of the first tranche of the Fund assistance. And true enough in anticipation of Fund’s relevant conditionalities the current government too has already increased the prices of oil and gas as well as power tariffs and withdrawn a number of subsidies letting loose the rate of inflation to gallop causing the core inflation rate to jump to 8.2%, and headline rate to 7%. And, to adjust the monetary situation to the rising rate of inflation the State Bank of Pakistan has increased the policy interest rate by 100 basis points to 8.5%.
This would mean for the masses the hard times are likely to double over the next three to five years depending upon the harshness or otherwise of a bailout package from the IMF which is likely to come through only after we assure the Fund that we would sincerely attempt this time to successfully achieve the second generation structural reforms.
These reforms include expanding income tax base through bringing taxable non-taxpayers into the tax-net, switching from indirect to direct taxes through FBR reforms, reforming loss-making Public Sector Enterprises through public-private partnership, reducing circular debt through reducing transmission and distribution losses and investing in renewable energy sources, and enforcing strict fiscal discipline.
The real test of the government’s intentions and its capacity to implement second generation structural reforms, therefore, would come when it is time to distribute economic hardship equitably across all sections of society through tax reforms and withdrawal of special tax concessions accorded from time to time to the members of the ruling elite.
It is at this stage that successive governments have been seen to have failed miserably. More so because being essentially a security state no government could afford to ignore the escalating hardware needs of an army engaged in a four-front low-intensity war for over a decade.
Indeed, for the last 10 years or so, Pakistan has been engaged in a war with India (on the Line of Control), Afghanistan (the Durand Line), the domestic terrorists inside the country and has also been fighting the so-called hybrid war. Wars are not fought on empty pockets. And weapons don’t come cheap or; at discounted prices as the US has already turned off its military aid tap.
It is to be seen how the PTI government handles these second-generation structural reforms to achieve its goal of setting up an Islamic social welfare state while financing a security state.
Pakistan is likely to enter negotiations with the IMF mission team on Nov. 7 with only half of Prime Minister Imran Khan’s ‘desperation’ for money taken care of as on the face of it, it appears he has not been able to obtain an immediate bailout package of any size from China.
It is likely that a rescue package would perhaps be put together after detailed discussions between relevant authorities of the two countries as was pointed out by China’s Vice Foreign Minister Kong Xuanyou. This is expected to take place hopefully sooner than later.
Meanwhile, we will have to make do with the Saudi rescue package of $6b which can plug only half of the $12 billion financial hole that we need to fill before we enter into talks with the IMF.
Half of the Saudi rescue package is a short-term one-year loan (carrying a mark-up of three percent) for balance of payments support and the other half is a deferred payment facility on oil imports. This facility would possibly be extended over the succeeding two years - an arrangement that could possibly go even beyond the third year. The proposal to set up an oil refinery by KSA has also been reiterated.
Meanwhile, the question that is being increasingly asked by knowledgeable circles is about the price tag of the Saudi rescue package hoping that the PTI-led coalition government has obtained the package without having had to get involved in the Gulf disputes.
The UAE is also expected to offer oil on deferred payment facility amounting to $1-2 billion. This package too one hopes would be obtained without any political cost.
Beijing is not likely to offer a direct bailout. However, it may offer loans amounting to about $4-5 billion for short gestation projects under China-Pakistan Economic Corridor (CPEC) initiative.
Pakistan also needs to sit down with the Chinese counterparts and review the Free Trade Agreement (FTA) it has signed with Beijing as it has so far only benefited China whose exports to Pakistan are touching $13 billion while its imports from Pakistan are stuck at under $2 billion.
If the news that trade between China and Pakistan would be settled from now onwards in yuan rather than dollar is true then perhaps pressure on our diminishing foreign exchange reserves would hopefully be reduced to the extent of our Chinese import bill.
Also there are a number of low-tech industries that have become economically unviable in China because of increasing labour costs. These industries could be relocated in Pakistan for mutual benefit. This policy could also help China in side- stepping some of the adverse side-effects of on-going trade war imposed on it by President Trump.
Since bailout packages from friendly countries have so far remained unable to ease more than half the pressure on our ability to meet our immediate financial obligations of about $12 billion the possibility of the US using the IMF programme to impose rather indirectly some unacceptable non-economic conditions on Pakistan cannot be ruled out completely.
Pakistan has already rebutted the Trump administration’s claim that CPEC was responsible for Pakistan’s debt problems and, therefore, its need for the IMF bailout. The total repayments to China is said to average $300 million over the next three years. This has already been explained to the US representatives and also to IMF chief Christine Lagarde. And the government has already said that CPEC agreements and loans would be placed before parliament and shared with the IMF.
