Prior actions and the IMF

It`s entirely correct and appropriate for the interim government to hew to a minimalist line. They are right to eschew any deals with the IMF and leave such policy decisions with long term consequences for the next government.

After all, the interim government has a limited mandate to hold elections in a fair manner and then exit the stage.

It was thus a little out of line for the financial advisor, Mr Shahid Amjad Chaudhry, to complain about the terms of the 2008 Standby Arrangement. He went to Washington DC to attend the annual spring meetings of the IMF and the World Bank, and also held some consultations with the IMF on the outlines of a possible new facility to help with the repayments of the last one.

So far so good. But it was a little beyond the call of duty to complain about the stringent repayment requirements of the last facility or about the conditionality attached to it.

That was a decision made by the last government in the midst of a balance of payments crisis, and it is not the job of the financial advisor of an interim government to pass judgement on it five years later, and that too before the very creditors whose help he was discussing.

But that being a minor point, the good news here is that the interim government is resisting all temptations to play saviour and rightly keeping itself within safe bounds of a minimal agenda. Of course this means that the incoming government will have little time in which to find its feet, and realise that we are drifting towards another balance of payments crisis if corrective steps are not taken very quickly.

Fortunately though, much of the groundwork for these steps would already have been done. There`s lots to fault the last government onregarding its economic legacy, and where Hafeez Shaikh clearly struggled to be heard when he tried to sound a note of caution regarding the direction in which the country`s balance of payments was headed, he found that there were other voices that were contradicting him and arguing that all was well.The other voices, we are told, included State Bank Governor Yasin Anwar, who is still around to see the fruits of his efforts bloom. But the other one is gone, Minister of State for Finance Salim Mandviwala. So now that the can of an inevitable approach to the IMF has been kicked a few months further down the road, all it means is that the incoming government will have very little time to lose and will need to knock on the IMF`s door within weeks of being sworn in.

But unlike 2008, there is an upside here. Back then the newly minted PPP government took many months to realise that the country`s balance of payments was deteriorating and carrying it towards a financial crisis. Even after the realisation set in, much time was wasted in the hope that the Friends of Democratic Pakistan would come to our aid and an approach to the IMF would not become necessary.

As early as July 2008, during his maiden visit to Washington DC as Prime Minister, Mr Yusuf Raza Gillani was told in very clear terms by ev-erybody he met that he should quickly get onto an IMF program before any other bilateral aid could be arranged. But the government held on to the hope that the Chinese would come through with cash assistance, or that the Saudis will arrange another oil facility of the 1998 sort.

As late as August, then finance minister Naveed Qamar was continuing to sound optimistic notes about the possibilities of a $7bn oil facility that the Saudis had given their assent to. Of course no such thing had happened.

When Shaukat Tarin became financial advisor, he had to start from scratch. A panel of economists had to be assembled and, huddled for days in the ground floor rooms of the Lahore Gymkhana, they worked to produce a roadmap, an economic plan of sorts, which called for strict efforts to restrain the yawning deficit.

On the other track, there was a large effort at persuasion that was required to get the cabinet to accept the inevitability of an IMF approach.

Of course this effort was aided along by the sharply negative turn of events from October onwards, but nevertheless, the approach had to be made from scratch and in a very short timeframe.

No such problem awaits the incoming government this time. Hopefully they`ll be quick in realising that they need to get onto a program before the crisis arrives. And once they`ve decided, much of the spade work for the actual facility appears to already have been done.

There will remain the pesky question of `prior actions` the code words used by the IMF to indicate that they will ask for some difficult conditions to be met before any money can be disbursed. These `prior actions` are bound to include revenue measures, such as removing tax exemptions from powerful business groups, and perhaps tariff reform in the power sector, bothpolitically difficult to achieve.

But if push should come to shove, the government may be able to get the IMF to back down from demands for `prior actions` by playing the American card. This will be the key to watch out for. Will the new government insist on money first and deliverables second, or will the IMF succeed in staring them down by insisting on `prior actions`? From what we hear, the IMF did indeed speak of `prior actions` with the Pakistani team during their discussions in DC, but the finance advisor chose not to dwell on that aspect of the talks in his public remarks upon his return.

A fair amount of consensus is already building that an approach to the IMF will be necessary very soon. What remains to be seen now is how well they`re able to manage this question of `prior actions` and how the international community plays its cards at the crucial time.• The writer is a Karachi-based journalist covering business and economic policy.

khurram.husain@gmail.com