Blank on the IMF

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By Khurram Husain

THESE are some of the strangest IMF talks I have seen in a long time. I don’t recall the last time a finance minister declared Pakistan’s balance-of-payments crisis to be resolved on the eve of the talks.

It’s also hard to recall the last time talks began with the Fund while news of a large bailout package from a ‘friendly country’ (in this case China) was still awaited. Surely that news will have an impact on the size of the facility being sought, as well as the projections for inflows via exports that are so ­central to programme design and the quarterly ­targets for reserve accumulation that it contains.

One possible explanation could be that the size and nature of the Chinese ‘bailout’ is known to the government and has already been communicated to the Fund, but is not being shared with the larger public. If true, this would be an odd state of affairs, given how keen the government has been to project success upon its return from the trip to China.

It’s hard to recall the last time talks began with the Fund while news of a large bailout package from a ‘friendly country’ was still awaited.

The finance minister said upon coming into office that he needs up to plug a $12 billion hole in the balance of payments to make it through the year. The problem begins in earnest next year, when the same projections show the external financing requirement jumping to $33.8bn, and this amid a possible slowdown in exports and remittance inflows. Given a combined Saudi and Chinese deal to cushion the balance of payments — exports to China and oil facility from Saudi — will be important, but will not be a substitute for critical reforms.

Another important thing to bear in mind is that the projections on external financing requirements for the medium term are likely to be revised upward after the latest round of talks. This has happened once already, between the projections given in the July 2017 Article IV report and the March 2018 post programme monitoring.

As per the Article IV report issued in July 2017, for example, the projected gross external financing requirement for fiscal year 2019 was $21bn, or 297.1 per cent of exports, which was revised upward to $27bn by March of 2018, or 310.6pc of exports.

This is a sharp upward revision considering the time between these two reports is barely eight months, so either some new information came to light in the intervening period, or more short-term debt was taken on in large quantity, or a grievous error was made in either one of the two cases. The latest projections for this crucial figure — gross external financing requirement — is the first thing to look for when the programme documents of the latest facility are finally uploaded to the IMF ­website, which should be sometime in January.

If the medium-term projections on this crucial figure are revised upward again significantly, we will know that the painful adjustment that will begin at that point will be more protracted than at first imagined. But if the revised projections are not significantly changed from their levels in March, then we can entertain the idea that the steps taken thus far — exchange rate depreciation and interest rate hike — should go a fair way to adjusting to the new reality the government has just bowed before.

After that, the size of the fiscal adjustment will be the next big thing to look for, particularly where the fiscal deficit ceilings have been set under the programme.

What makes the whole enterprise strange at the moment is the sheer absence of anything concrete to go on thus far. Usually by this point, when the two parties are in the thick of talks, some indications begin to appear about the shape and direction of the reforms that are being discussed. For example, in the March report the IMF had pointed out that ‘decisive action’ will need to be taken on state-owned enterprises to help arrest a growing fiscal deficit. But on the eve of the talks, we have seen our finance minister loudly and confidently declare that privatisation is not his government’s programme and they plan to turn the SOEs around while retaining their ownership.

To buttress his argument he points out that a large number of the companies on the Fortune 500 list are state-owned enterprises, which is a fair argument, and says that he disagrees with the philosophical idea that governments should not be in the business of running commercial enterprises, which is also a fair argument. But an equally fair question that remains is this: how exactly do you plan to stem the losses and turn around the health of the enterprises without creating a greater ­burden for the fiscal framework?

We understand that there is some sort of a plan involving the creation of a sovereign wealth fund, and this plan has been shared with the IMF. Nobody I know has seen this plan yet, and its credibility has not been put through the test at the moment. Likewise the imperative to broaden the base of revenues. Do they intend to expand the tax net? And if so, how? Other than a few minor tweaks, such as the strengthened enforcement and bifurcation of policy and tax collection functions at the FBR, there is no indication of a strategic direction for tax reforms at the moment.

The same goes for improving productivity and broadening the base of exports. Will we remain a textile exporter by the end of the government’s term, or would new, sunrise industries be taking off by then?

This is the strangest programme I have seen in many years, because never before has there been so much and so little said about where we stand on the eve of the talks, and where the government intends to take us as at this time. Let’s hope this week proves pivotal in turning that around.

The writer is a member of staff.