Pakistan’s inconclusive IMF talks - Dr Ashfaque H Khan - Tuesday, March 15, 2011

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At the invitation of Pakistan, an IMF mission visited the country from March 1 to 11. During their stay, the members of the mission held discussions on structural reforms and economic stabilisation with the authorities. With reference to structural reforms, the discussions centred on improvement of Pakistan’s public finances and its financial sector. Discussions on economic stabilisation focused on addressing inflation, reducing budget deficit, reviving economic growth, handling the rising cost of oil prices, and improving governance.

Talks between the IMF and the Pakistani authorities remained inconclusive even after 11 days of engagement. A trust deficit was quite visible as the IMF wanted action from the authorities, while the Pakistani team tried to convince the IMF that this country would be taking a series of measures to address its economic challenges. The trust deficit, nevertheless, could not be bridged and the talks ended inconclusively.

The press released issued by the IMF at the end of the talks reflects the concerns of this Institution. The press release spoke of the need to reduce the budget deficit in the current fiscal year, and said that measures, if implemented promptly and consistently, will help improve budgetary revenue. The IMF also asked the ministry of finance to improve debt-management and governance, and promote savings, investment and growth through financial-sector reforms. It has also warned that “significant fiscal consolidation will be needed in 2011-12 to reduce inflation and ensure debt sustainability.”

The outcome of the inconclusive talks was only a piece of advice from the IMF to the Pakistani authorities to reduce the budget deficit, broaden the tax bases to mobilise additional revenues and improve debt management and governance.

Why did the talks remain inconclusive between the IMF and the Pakistani authorities even after 11 days of engagement? The answer is simple. The Pakistani team was ill-prepared because it had not done its homework before inviting the IMF team. It did not handle the mission properly, lacked coordination, and the finance minister remained inactive until March 8, the last day of the originally planned meeting.

The IMF mission landed in Islamabad on March 1, and the technical level discussions continued till March 6 while the policy-level meeting started on March 7, and the finance minister joined the meeting on March 8. The talks ended inconclusively as the Pakistani team failed to give firm commitments on several measures that they had planned to implement. Telephone calls were made to the right quarters in Washington, D.C., requesting the extension of the visit of the IMF team for two or three days. The request was granted after promises by the Pakistani side that some actions will be taken within these days.

The Pakistani team went to the president with a wish list of measures that needed to be announced. As reported in the press, the president did not approve the list. Should the president be blamed for not approving the wish list? Was the president given enough time to look at the political consequences of the wish list? Is it justified to “force” the oresident to approve the wish list at the eleventh hour? The answer is no.

In my opinion, the Pakistani team should have taken the political leadership into confidence, the president in particular, over the list of measures before inviting the IMF mission. This was not done, and as such no agreement on FBR revenue and budget deficit for the year was reached with the IMF.

The IMF has asked the ministry of finance to improve its debt-management ability. Why has it specifically asked for improvement of debt management? Pakistan’s public debt has not only grown astronomically in the last three years, but the maturity profile of domestic debt has worsened as well. The share of short-term debt (less than one year) in total domestic debt jumped from 42 per cent in end-June 2007 to 53 per cent by end-January 2011. The bulk of short-term debt is now being concentrated in three months’ maturity, and as such is creating serious difficulties for the management of public finances.

Three months’ maturity accounted for only one per cent of short-term domestic debt in end-June 2009 but increased to 37 per cent by March 11. Accordingly, 12 months’ maturity declined from 76 per cent to 31 per cent during the same period. More alarmingly, Rs237 billion and Rs302 billion worth of short-term debt is maturing in the first and third weeks of April 2011 as such, and the government would have to refinance Rs539 billion maturing debt in April alone. It would be a nightmare for the finance manager to raise such a large sum of money in just one month. The IMF team expressed their serious concern over this development and asked the authorities to improve debt management. The finance minister needs to devote more time to debt management and strengthen its debt office by inducting professionals. The debt office has been the nerve centre of the country’s macroeconomic policies. It has been crippled deliberately by the previous and current finance ministers.

It is abundantly clear that the current economic team is weak, lacks the capacity to address Pakistan’s fiscal challenges, and loves to live in the past, as it wants to impose a flood tax after eight months of the unfortunate disaster. And the team and its captain are shy of facing the people and the private sector. Additionally, their laidback and lethargic attitude has caused serious difficulties for the country and its economy. The worsening of the maturity profile of domestic debt is the latest addition to the difficulties. Mishandling of the IMF mission may result in further cooling of relationship between Pakistan and the international financial institutions. Good job, Mr Finance Minister!

The writer is principal and dean at NUST Business School, Islamabad. Email: ahkhan

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