Is Pakistan ready for the IMF?

Analysis & Dr Khaqan Hassan Najeeb
Wednesday, Mar 13, 2024

The playbook of the International Monetary Fund’s (IMF) mission for a new facility for Pakistan may not be much different from before. After over a week of largely lop-sided negotiations based on Pakistan’s economic data and quantitative homework done by IMF officials, the visitors will announce a verdict on the health of Pakistan’s economy.

The IMF folks, most with advanced university degrees, will typically use a variety of analytical techniques involving econometric models, single equation estimates, cross-country parameters, and a general economic sense to model a macroeconomic framework for Pakistan.

The result of the discussions will be a vexing set of conditionalities. There may be the usual ramblings on the government’s side about the IMF’s lack of compassion in program design and a cookie-cutter approach. These may or may not help manage public sentiment - as authorities anxious for a bailout will accept the recommendations as fait accompli, unless they have a different scheme of arrangement in mind.

It is a sobering moment for Pakistan. Authorities eagerly await the doctor of the last resort – the IMF– for a 24th facility in Pakistan’s 76 years of existence. A frightening statistic indeed, as countries should rarely exercise the option of turning to the IMF. Financial support should only be sought to overcome grave crises like short-term balance of payment (BOP) crises, caused by exogenous or endogenous shocks and to create breathing room to implement policies that restore economic stability and growth.

What is equally concerning is the on-again-off-again, roll-back, and half-hearted follow-through approach in utilizing the IMF prescriptions, resulting in Pakistan barely crossing the finish line in only one extended fund facility.

It is time for introspection given a non-serious backdrop of incompletions and the precarious fundamentals of our economy. This may help us rethink our approach to dealing with the IMF.

Many in Pakistan informally refer to Pakistan’s soiree with the IMF as an IMF programme -- when in fact it is a Pakistan programme supported by an IMF facility. Pakistan has to approach the new programme with unwavering responsibility and full ownership. Ownership means the responsibility to formulate and carry out programme policies in line with Pakistan’s context. It means trusting that enduring the programme adjustments is in Pakistan’s best interest.

Strong political ownership is built when the programme is aligned with national reform plans, develops some kind of communication strategy, and crucially an implementation capacity. Experience shows engagement with domestic stakeholders increases programme effectiveness. Once the home team has done all this hard work, the IMF should be used to fill the knowledge gaps.

Authorities have to map out and propose the contours of an economic agenda for Pakistan that becomes the basis of the initial Memorandum on Economic and Financial Policies (MEFP), the document a country signs for approval of the IMF board at the start of a programme. Let us try and broadly lay down certain principles for that exercise.

Principle 1, which is overarching, is that the real path to tackle persistent macroeconomic and fiscal imbalances is to create endogenous growth through measures tackling the real sector. Principle 2: it’s not only about avoiding a default, it is about designing a programme that will push the process of a comprehensive set of economic reforms that the country so desperately needs. Principle 3: formulate policies that build Pakistan’s productivity and growth potential by strengthening our ability to think as we eliminate areas of rent-seeking behaviour in the industry.

Principle 4: take a path of deregulating Pakistan’s economy and supporting trade and investment reforms. Build programme measures that realize that public and private investments drive productivity which drives growth.

Principle 5: broaden the tax base in a progressive way. Principle 6: ensure fiscal consolidation is divided between tax and meaningful expenditure reforms. Tight fiscal policy tames inflation and provides room for the central bank to cut its policy rate. Principle 7: social spending with an agenda of targeted subsidy is necessary to protect the vulnerable. However, recent research highlights that supporting asset-based transfers helps people graduate from poverty levels.

Principle 8: redesign the energy sector based on creating an energy market, rather than relying on energy sector pricing changes. Principle 9: state-owned enterprises are to be gradually handed over to the private sector, along with binding the regulators to create well-functioning markets in the country. Markets regulate firms, providing the incentive for them to achieve both productive and allocative efficiency. Principle 10: formulate measures that restore Pakistan’s public debt sustainability, including debt recycling, reprofiling, and restructuring.

Principle 11: ensure that the monetary policy is guided by an overriding objective of reducing the headline inflation year on year to a target range and measures to improve monetary policy transmission. Principle 12: ensure Pakistan’s external sector vulnerability by examining new methods of financing the current account.

These principles broadly outline Pakistan’s reform agenda to restructure its economy. Those spearheading Pakistan’s programme must recognize that the IMF’s role centers around managing the nation’s BOP challenges and macro imbalances; however, we are acknowledging that BOP and macro stability hinge upon undertaking more fundamental interventions. The programme design has to get these nuances right. The MEFP has to carry some of the well-articulated deeper measures -- that are doable and socially palatable -- along with the usual adjustments. A very grueling task indeed. The programme is subject to prior actions, quarterly performance criteria, continuous performance criteria, indicative targets, and structural benchmarks which may all need a lot of serious work at our end.

Soft skills always matter in programme negotiations. Harmony between the mission team and Pakistan authorities is helpful. Authorities’ conviction about their handle on the data and skills to convince the fund of alternate views is quite possible. I have said to many country authorities that they know their ground realities better than the visitors – this must come through.

The authorities must always keep in mind that the IMF work is backed by several departments including fiscal affairs, legal, monetary and capital markets, and strategic policy and review. A multitude of professionals sign off on the dotted line before even reaching the staff-level agreement. The design of a worthwhile programme with the IMF is pivoted on our preparation, our ability to interpret data, and present our convincing technical analysis. This is not easy for many a country as it needs a high caliber, trained, professional, and thoroughly prepared team.

Pakistan’s moment of truth is here. The nearly two dozen engagements with the Fund have been kind of a moral hazard making Pakistan dodge deeper reforms and rely on repeated rescues. Our geo-strategic importance has waned. Aid flows have consequently reduced leaving the country exposed on the external account.

So, folks here is the challenge for Pakistan. The 24th facility with the IMF needs strenuous work. Can Pakistan put on offer a set of essential policy measures and adjustments that are credible for an Extended Fund Facility with the IMF- and promise real reform? In some sense, our prosperity or lack thereof will depend on forging the capability to meet this challenge. Hopefully, we can reverse our diminished reputation of outsourced thinking this one time. The writer is an economist and a public-sector specialist, who has served as an adviser to the Ministry of Finance.