Abandoning Reforms?

By Amir Zia
The News
September 22, 2011

By pulling out of the IMF programme, the government effectively averted reforms till 2013 and got itself a free hand to take those steps which are a firm “no” from the global lenders but are seen as crucial in the election year for any political party

Should we celebrate the fact that Pakistan has managed to get rid of the International Monetary Fund (IMF) umbrella yet again and has won back its economic “independence and sovereignty” as many opinion-makers, experts and politicians have been demanding for some time? Will the decision to part ways with the IMF - considered the ultimate villain by many rightwing and leftwing pundits - bring prosperity, growth, and better days for the toiling masses? Will it put the country back on the high-growth trajectory and help reduce double-digit inflation? And does this mean that the era of IMF programmes is now over for Pakistan?

These questions remain pertinent as another IMF programme with Pakistan met a premature death due to the government’s unwillingness to deliver on the promised reforms seen necessary to end the low-growth and high-inflation cycle that has been plaguing the country for the last three years. Despite repeated promises, the government failed to deliver on any of the performance benchmarks, including imposition of the Reformed General Sales Tax (RGST), slashing the fiscal deficit gradually to below four percent and phasing out the untargeted subsidies, especially in the energy sector that cost the national exchequer a whopping 350 billion rupees in the last fiscal year.

These benchmarks were not thrust on the government unilaterally by the IMF. It was the PPP government which agreed to these reforms when it signed the Standby Arrangement with the IMF in November 2008 in the wake of a balance of payment crisis. The conditions were not imposed, but were homegrown. That is why it is called the IMF-supported programme.

Former finance minister Shaukat Tarin, who signed the deal, kept the programme on track in its initial phase. Once Tarin was gone, his successor, Abdul Hafeez Shaikh, failed to match his words with actions. The politics of expediency, bitter opposition from PPP allies, and rivals and interest groups never allowed reforms to take off under Shaikh’s leadership. Yes, there were floods and terrorism that prevented Pakistan from realising its economic potential, but these were factored in as the IMF repeatedly shifted the goal post. However, the government failed to meet any performance benchmarks, which were lowered to accommodate Pakistan’s difficult circumstances. This noncompliance resulted in the suspension of the programme in May 2010 following which disbursement of the last two tranches worth $3.7 billion of the $ 11.3 billion loan were put on hold. Since then, Shaikh and his team have made a number of promises concerning the implementation of the programme, all of which were subsequently broken. Shaikh hardly had a chance to get the stalled programme revived as doing so necessitated tough, unpopular steps such as imposing the RGST, introducing power-sector reforms and slashing untargeted subsidies. But such measures remained out of the finance ministry’s power – especially when the political masters have their eyes set on the next elections due sometime in 2013. And going by conventional wisdom, whenever electoral politics is about to gain momentum, it is not the time to take tough measures. The easy way out for the government was to pull out of the IMF programme, which it did, by announcing the decision on September 16 on the eve of Shaikh’s departure to Washington for annual talks with the multilateral donors.

By pulling out of the IMF programme, the government effectively averted reforms till 2013 and got itself a free hand to take those steps which are a firm “no” from the global lenders but are seen as crucial in the election year for any political party. This means giving subsidies and benefits to select sectors and interest groups that help consolidate a vote-bank. In the PPP case, the prime beneficiaries remain farm owners and feudal lords, who already made a windfall following the government’s controversial decision to increase the support prices of key commodities including wheat, which has a high inflationary impact.

The government’s confidence to go solo comes from its relatively comfortable fiscal position - thanks to around $18 billion foreign exchange reserves, continued flow of high remittances from Pakistanis working abroad and higher exports. Certainly, this is enough to keep the government going in the remaining months of this fiscal year and the next – in which elections are due - without facing a balance of payment crisis. If the government manages to import oil on deferred payments, it will get more breathing space.

But the real issue is not surviving from one year to the next. The real question is whether the government and Pakistan’s ruling elite want to go for structural reforms which are a must to keep the state viable. Unfortunately, there is hardly any resolve or even serious debate when it comes to pressing economic issues. No wonder even the big decision to end the IMF programme was largely ignored by the opposition. There was hardly any comment, evaluation, or criticism from parliamentarians, which underlines the fact that the economy is one issue which is not on the radar of the country’s ruling elite. Only some economists discussed the pros and cons of this decision which will have a catastrophic impact on the economy in the mid to long-term as a delay in reforms means that the country will remain stuck in a high-inflation and low-growth cycle in the years to come.

It will not just hurt the poor, the lower and the middle-income groups, but will also further erode the investment climate. It sends a negative signal to foreign investors, already wary of Pakistan in a climate in which even the domestic investors are on the sidelines and busy finding safe havens for their money abroad.

The absence of an IMF-supported programme will make it difficult for Pakistan to raise funds from other multilateral and bilateral donors, who doubt the government’s ability to run and govern the economy in a transparent manner. Indeed, the PPP government can gain political mileage in the short term by abandoning the IMF programme, but its long-term price will be paid by the people and the economy - already battered by floods, rain, terrorism, violence, political instability and poor governance.

The people of Pakistan rightly deserve an assurance from finance ministry wizards in loud and clear terms that in quitting the IMF programme, they are not abandoning the process of reforms. The civil society, economists and the political parties need to keep pushing the government to take measures to expand the tax base – that include taxing the agricultural income, controlling unnecessary expenditure and providing clean governance. Failure to do so will take us back to the IMF door sooner rather than later as has happened so often in the past.