For most of the IMF programmes since 1988, a coupling of short-term programme (Stand-by SBA) with a medium-term programme (Extended Fund Facility (EFF), variously named) has been the norm. The idea used to be that an immediate intervention through an SBA would stabilize the economy and subsequently structural reforms should create investment opportunities needed for engendering a process of reforms.
The two exceptions have been 2008 and 2013. In 2008, the stabilization was an utmost need and hence an SBA (for 23 month) was signed. In fact, that programme was sought four years after a near successful medium-term Fund programme over the period 2001-04. There was a feeling at the time that, going forward, Pakistan would no longer need a programme. The international global financial crisis, and domestic upheavals, however, created conditions whereby seeking a Fund programme became inevitable. It was, therefore, conceived that perhaps it was a temporary disruption in the economy and SBA would restore the economic disorder and the need for a medium term would not be felt. Generally, the SBA is focused on quick stabilization of economy by rapid correction of macroeconomic imbalances. What it means is to cut the fiscal deficit (through expenditure cuts and higher revenue collections), raise interest rates to slow down the investment demand and then hope to see its positive effects on containing the balance of payment deficit and building of reserves. But there are also some key structural reforms (like introduction of VAT-like GST in the 2008 programme), aimed at removing structural bottlenecks in the performance of key macroeconomic variables.
The failure of the programme midway was a setback and the Fund’s internal evaluation did not give high marks to the design of the programme and its implementation. One curious thing about the SBA 2008 was its exceptional amount of financing provided to Pakistan. To start off, 500% of Quota was approved, and after two reviews it was expanded by another 200%, taking the total financing to SDR 7,236 million, which roughly translated to US $10,709 million, a phenomenal sum. Since the programme was significantly front-loaded, by the time the programme was aborted, 80% of the financing was disbursed. On the other hand, the SBA requires repayment on a shorter period of nearly 3-5 years, and hence it is imperative that the goals of the programme are achieved so as to be able to easily return the money on time. The failure of the SBA, thus, posed a repayment challenge as the country soon found itself in a difficult state to repay nearly half of the financing and was forced to enter into a new programme in 2013.
When a new programme with the Fund was negotiated, discussions were held both internally and with the Fund, whether another SBA would suffice or a medium-term programme should be negotiated. The political leadership went along the advice of the Fund Mission and a medium-term facility of three years, called extended fund facility (EFF) was worked out in July 2013, which was finally approved by the IMF Board in September 2013. Alongside macroeconomic stabilization features, the programme was rich in structural reforms. In terms of financing, it was a miserly programme, some 430% of our quota with no front-loaded disbursements. In fact, the disbursements were equally divided over 12 instalments, besides one instalment at the time of approval. More interestingly, on a net basis, the size of financing was perhaps the smallest. Out of $6.4 billion, $4.2 billion were to go to repay the outstanding debts from the previous programme.
The stabilization features of programme required significant belt-tightening by sharply cutting the fiscal deficit, raising interest rates, monetary restraint (including a major cut back in government borrowing from the central bank) and major efforts to build reserves from all sources including, if needed, from direct purchases from the inter-bank. The performance criteria on these variables were mostly achieved, often with considerable margin also.
On the structural reforms side, as we noted, the programme had a rich agenda of reforms. And those reforms were implemented with passion and commitment. In the three-year period, the country implemented 51 structural benchmarks (including such landmark policies as elimination of SRO regime, improved public debt management, rationalization of gas and electricity tariffs etc.) and covering sectors like fiscal, monetary, banking & finance, trade and energy. Of these, 22 structural benchmarks required legislative efforts, of which 14 required enactment of full laws (including the Securities Act, Futures Act, Electricity Conservation Act, PIA (Corporatization) Act, Corporate Rehabilitation Act, Deposit Insurance Act, Credit Bureau Act, GIDC Act etc.), while 8 required amendments in existing laws (most notably establishment of monetary policy committee under the SBP Act). Having implemented such vast agenda of structural reforms, there were indeed a few disappointments as the government changed course on some policy commitments, particularly relating to divestment of public sector enterprises even though the required actions to prepare the transactions were taken on time.
The fundamental reason why the EFF was done was to acquire a longer repayment period. However, by wasting the opportunity to consolidate the gains made under the programme, we have again missed the opportunity to escape the vicious cycle of repeatedly going to the Fund. The period leading up to the commencement of repayment should have been used to make further gains in strengthening the economy.
Soon after the programme was completed, the economic managers returned to their familiar ways of practicing profligacy. This path inevitably reaches a point where the process has to be terminated, as country runs out of hard currency to make foreign purchases, especially to pay for the fuel bills or energy in general.
We are back to where we were five years ago. Pakistan is left with no choice but to seek a bail-out package from the Fund. The question would be whether to seek an SBA facility or medium-term. It is not a straight forward choice. It all depends on the outlook of the economic managers who would make those choices.
A confident and self-assuring Government would use the Fund in a frugal fashion: seek a front-loaded SBA (18-20 months), do the stabilization, and then be capable to swim at one’s own. This would require a great deal of discipline both during and after the SBA. Alternatively, an EFF would be sought. The problem with EFF is the length, which is strenuous, and the Fund dynamism (with the change of Mission Chief and other key personnel) keeps moving and would keep introducing new structural benchmarks.
The need for coupling, as in the early Fund programmes, is no longer required. The economy has matured to a point where primitive distortions such as lack of a capable private sector, or non-existence of markets, or widespread existence of administrative prices, no longer exist. What is needed is a linear progression, through steady steps, in moving forward, with no provision of course reversal. Following this strategy, there is no limit to where the country can go, based entirely on its indigenous strengths.Waqar Masood Khan, "The form and design of IMF programmes," Business Recorder. 2018-06-06.
Keywords: Economics , Investment opportunities , Fund programme , Macroeconomic imbalances , Performance criteria , Economic managers , Central bank , EFF , SBA , GIDC , PIA , IMF