Bottomline in Pakistan

For all its tough talk, IMF cannot pull out

The International Monetary Fund (IMF) has always been a quasi -economic and quasi-political institution. For all the hard bargaining and tough talking that IMF teams do with debtor nations, how the chips finally fall is almost always a function of political grand bargains between debtor nations and the Fund’s principal shareholders. Which is why it is not surprising that an IMF team that has been stationed in Islamabad for over a week has decided to extend its stay by another three days rather than pack its bags and fly back because talks between the Fund and the Pakistan finance ministry were going nowhere.

The IMF team, led by its assistant director for West Asia and Central Asia, Adnan Mazarei, has delayed its departure after Pakistan’s finance minister Abdul Hafeez Shaikh informed the Fund that the government was ready to cut back on power subsidies and come out with a time table for tax reform. At stake for Pakistan is a US$11.3 billion standby arrangement programme that was suspended after Pakistan failed to meet the policy commitments it had made. Given the geo-political stakes, both the US, the Fund’s principal shareholder, and China, the rising power in the Fund, have been more than accommodative of Pakistan’s needs. India, too, has adopted a supportive stance on the grounds that a stable Pakistan with a stable economy is good for regional peace and security. However, Pakistan has more often than not used its geo-political cards to bargain for better terms than most debtor nations. It has been able to get away so far with doing just about what is politically acceptable at home, avoiding the tougher job of reducing power and other subsidies.

The IMF team’s decision to postpone its departure from Islamabad, and avert the embarrassment of failed negotiations, was contingent upon a sharp increase in power tariffs and a hike in excise duties. The Fund had made it clear that it would issue its Letter of Comfort (LoC), enabling Pakistan to borrow more from the World Bank and the Asian Development Bank, only after some initial reform and revenue mobilising steps were taken. With these done, the focus will shift to medium-term fiscal strategy and economic reform programme. The unfortunate fact for Pakistan is that its economy has faltered ever since the Musharraf rule ended and a so-called democratic government had come to power. President Pervez Musharraf’s seven-year term in office (2001-08) was associated with an improvement in Pakistan’s economic and fiscal performance. However, in the last two years, Pakistan’s economic growth rate came down from the 6 per cent range to which President Musharraf had taken it to a lowly 2 per cent in 2009 and a little over that in 2010. Floods and domestic law and order problems have made matters only worse for a beleaguered nation. But the bottomline in Pakistan is that no major creditor wants it to fail, either as a nation or as an economy. Hence, it is possible that Pakistan does not feel the economic heat enough to put its house in order and take the tough economic decisions it must to restore momentum to its economy.