Time to make up

The cat is finally out of the bag. What Finance Minister Ishaq Dar and his team secretly feared when they complained about the IMF dilly-dallying over the ninth review is now the talk of the town: the Fund intends to extract guarantees of continuity incorporated into the incoming national budget before it will allow Pakistan access to the remainder of funds from its outgoing bailout programme. Now Dar and co are left with the gigantic task of juggling the competing priorities of pushing forward with economic reform and sweetening the ballot box in an election year as the country remains caught between a government struggling to stay at the helm and a lender using populist slogans to push its own agenda.

On the other hand, after all barbs have been traded, the parties cannot fail to come to the inevitable realization that mending fences is the only way forward. In fact, both sides can already be seen soft-pedalling towards a climbdown, paving the way for a rapprochement just in time before the programme sunsets on June 30. The IMF on its part cannot be seen economically destabilizing a country of more than 230 million over mere differences of opinion. As for Dar, his smug rhetoric of continuing with or without IMF help was almost credible for a while, but its stock vanished in thin air as soon as the new fiscal year appeared over the planning horizon. There simply seems to be no way the economy can stay afloat without IMF help over the coming fiscal year, given the magnitude of debt service payments due. In other words, not only does Pakistan have a compulsion to complete the current program, it also has an incentive to go into a new programme immediately afterwards.

The foremost of the outstanding differences at this point is a $2 billion gap between the projected financing needs to plug the country’s current account deficit. Dar nevertheless continues to express his hope to find another $2 billion in financing beyond the $4 billion already lined up. However, he is stuck in the middle of a weird vicious cycle where UAE-based commercial lenders are insisting they can roll over $2 billion in financing only after Pakistan has a staff-level agreement (SLA) with the IMF secured, but the Fund insists on signing the SLA only after the loans have been rolled over. It is still far from clear how this impasse will be resolved short of Pakistan coming with $2 billion in financing from other sources, which again is an uphill task and the clock has almost run out. Yet another stumbling block on the road to the SLA is an agreement over budgetary framework. Although Pakistani authorities have shared the necessary documents with the Fund staff, we have no word as to when parleys over the framework can take place.

Revenue collection target for the coming fiscal promises to be contentious matter, which incidentally has a purple lining: the necessity of higher revenue calls for heightened economic activity, which may be an opportunity to push for an expansionary budget. Can Dar convince the Fund to agree to an economic stimulus, at least for the first one of two quarters of the coming fiscal? Giving the economy full throttle for the initial few months of the new fiscal year makes sense whichever way you look at it. If appropriately pruned economic activity does indeed roar back, the Fund should in theory be satisfied, seeing higher revenue yields – provided only that this heightened economic activity does not send the import bill into the stratosphere, bringing the current account deficit back into play. The authorities will need to keep their eyes peeled all along, applying the necessary course corrections as and when needed. If it does not work as intended, there is always the option of applying an import compression in the latter half of the fiscal year.

Incidentally, this should suit the government just fine assuming the general election takes place on schedule in October. Roaring economic activity in the July-September quarter should set the coalition up favourably for the October polls, leaving the really tough work behind for the next government. While this may look very much like an electioneering strategy, the intentions of the government and the finesse of those charged with executing it can make all the difference in the world, which should not be lost on the IMF. Therefore, here's hoping that, despite all the roadblocks, the IMF and Pakistan's economic managers make up, inject precious liquidity into the economy before the current fiscal is out, and sit down to thrash out a new programme first thing the next fiscal year.