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A new IMF programme

The International Monetary Fund team is seemingly all set to revisit Islamabad soon armed with a new programme for our acquiescence, as we struggle to discharge our dues to them as well as give comfort to the market regarding the level and stability of our foreign exchange reserves.

This article argues that if there is to be a new Fund programme there are three key aspects, other than its content/prescriptions, that are of relevance: its timing, its ownership and the nature of the crisis that it will be attempting to avert.

Take timing and ownership. Even those with a cursory exposure to our style of governance (of buying time, complacently thinking that the world cannot ignore us!) and manner of financial management would know that the extent and quality of our preparation for any crisis (which most commentators regard as inevitable in the foreseeable future) continues to be casual.

However, it would be difficult to predict exactly when the tipping point will arrive. The caretaker government would have a limited mandate to only hold elections and, at best, check the hemorrhaging of scarce resources and financial extravagance and low priority spending — especially to safeguard the external accounts. With restricted responsibility and no moral authority, it would hardly be in a position to negotiate a programme with the Fund.

Our history of repeated failures of IMF programmes — over a dozen by now —should force both parties to undertake a dispassionate review of the more recent disappointments. An honest appraisal of the scope of previous programmes, the prescriptions and the time frame for their implementation, should compel both parties to think afresh because yet another Fund programme is destined to fail without ownership by the government assuming power after the elections, resulting in the IMF blaming us for having signed on but not meeting our commitments. Rather conveniently for the Fund, it would be our fault, yet again.

In other words, for holding the new government accountable, the timing is not right. Next, what crises would such a programme supposedly address? Our well-known problem is our stressed external account and the worry about our inability to meet our external obligations on time, even if our past record is by and large exemplary on this front.

Our foreign exchange reserves without additional flows from our benefactors (or sudden substantial inflows of remittances through the official system) are barely able to finance two months’ imports and are projected to fall to more perilous levels (below $6 billion) by the end of June. Hence the concern that we could go belly-up by end of calendar 2013, without adequate funds to repay our foreign lenders.

The other nature of the crisis could take the form of market sentiment taking a turn for the worse, betting against the rupee and forcing its ‘freefall’. Since the rupee is overvalued by seven to 10 per cent and needs adjustment anyway such an event, a default outcome, may just be a blessing in disguise — supporting exports and discouraging imports.

But what would constitute a freefall with all its political and economic implications, its value crossing Rs110 (although, for essentially a short period, exporters by holding back their receipts and overseas Pakistanis their remittances, would increase pressure on the rupee)?

Luckily, our banking system is not integrated with the global financial system and given the country’s image large transfers to Western financial institutions from Pakistan would not be accepted. Furthermore, if it were possible for speculators to borrow large sums of money or liquidate other assets (like property) hurriedly to accumulate dollars and ferret them abroad then the situation would be much more worrisome.

In reality, there are severe limits to the credit that would be available for financing such transactions and on the amounts that could be transferred abroad. Hence, speculators would have to cash rupee deposits or quickly dispose of other assets to convert into dollars.

The speedy sale of assets would lead to a lowering of their price (a disposal at a relative loss) because the market would sense this as a distress sale, inducing a correction in the strategy of the speculators. In other words, an automatic stabiliser, a self-correcting mechanism, would come into play.

Our Achilles’ heel could be the foreign portfolio investment in our stock market (with a market capitalisation of Rs340bn, approximately $3.5bn) and the revenue reserves available with the multinationals in the country for repatriation as dividends. These two factors could reinforce the downward spiral of the rupee as portfolio investors seek a hasty exit and panic-stricken foreign companies transfer reserves to the head office’s coffers.

To summarise the arguments above: a) the timing for getting programme ownership is wrong; b) it is not possible to precisely predict when the crisis involving our default on our external obligations may occur; and c) we need a better analysis of the risks and likely outcomes.

However, the above arguments do not in any way dilute the need to be mindful of the pressures building up on the external front. As the deputy chairman of the Planning Commission is reported to have put it, rather well, this already diagnosed chronic heart patient is carrying on with its leisurely lifestyle, despite running cholesterol levels of 600, smug in the knowledge that it has not had a heart attack.

We can ignore such symptoms at our own peril, although when it will cause sudden death may be difficult to foretell accurately. In other words, we should continue to engage with the Fund as well as undertake a serious analysis of the risks and the politically marketable limitations of measures to address our problems. It is highly disturbing that none of the political parties have even touched upon this issue in their manifestos or public pronouncements.

The writer is a former governor of the State Bank of Pakistan.

Shahid Kardar, "A new IMF programme," Dawn. 2013-04-02.