THE GOVERNMENT is now at a crossroads and whatever road it chooses is likely to make history. Inequality has been reached with the resumption of the IMF program, and the choice facing the government is whether to continue down the path of deficit reduction as committed to the IMF or chart a path considering the upcoming elections. The two cannot go hand in hand for a long time because the first involves tightening the belt and the second involves increasing spending, so choices have to be made.
If they choose to stick to the commitments former finance minister Hafeez Sheikh made to the IMF, which received approval from the IMF board on March 24, they would have to sharply curb spending, raise electricity and fuel prices, raise taxes and cancel much of the support already they have given the industry since the Covid crisis, the support that people in the industry have become accustomed to.
The prime minister has come under increasing pressure from within his own party to allow for greater spending by the MNA in their constituencies to help shore up their election prospects in the upcoming elections. To be ready to face their constituents and voters in 2023 – a reality they will face less than two years from now – they argue that they need to immediately start spending on upgrade schemes and projects. So far, Hafeez Sheikh has limited these spending, making him a very unpopular figure in his own party. He pays more attention to his commitments to his creditors than to the demands of his party’s MNA.
There are growing signs that the government intends to try and renegotiate the terms of the Fund program.
Now, there are increasingly signs that the government intends to try and renegotiate the terms of the Fund program that the Sheikh signed. It’s hard to imagine how this could be done, given the board approved the commitment and a $ 500 million first round of approval was issued. Hammad Azhar had said in his inaugural press conference that the IMF agreement could be “reviewed” while Imran Khan said, at the launch of the UN report on Tuesday, that he would seek a “second package” from the IMF.
It is not clear what these words actually mean. Is Hammad talking about the regular reviews that all IMF programs carry out as they are implemented? Or does he or she want to ‘review’ commitments before starting implementation? And by the ‘second package’ is Khan referring to another set of commitments under the existing program? Or does he intend to ask for another loan like the one they got last April when the Covid lockdown started, the $ 1.4 billion from the Fast Financing Facility that came selflessly?
In any case, it would be a great achievement if they managed to persuade the IMF to change the targets described in the commitment the Sheikh made to the IMF prior to his departure. I don’t remember a different time when Fund program targets were renegotiated so quickly after board approval and disbursement of that phase.
If they stick to their commitments, they will make history by becoming the first government in at least a quarter of a century, if not longer, to make IMF-mandated adjustments twice in a period. All previous governments have followed the same path: they come to power, find foreign reserves depleted, approach the IMF for emergency assistance, apply painful adjustments for a year or two (sometimes even three), build reserves and fiscal space, then switch to electoral mode and spending large sums of money to try and shore up their election prospects, a move that once again drained reserves and increased deficits.
No government has managed to win re-election for at least the past three decades, meaning each government ultimately leaves a dwindling treasury and huge deficits for its successors who then walk the same path. We’ve seen this story repeat itself since at least 1988, when our story of a lasting return to the IMF began. What we haven’t seen, however, is the government making adjustments twice, and at the very least, initiating the adjustments just as the looms of an upcoming election looming over.
It is not surprising that they have been cool in carrying out the commitments made by the Sheikh to the IMF. We do not know what that commitment is because the IMF has not, as of this writing, released the program documents. Standard practice is for these documents to be released within days of board approval. But more than 10 working days have passed since the board’s approval on March 24 and there is still no sign of it at this point. The IMF said their operations were slowing down due to Covid-19, and workloads were increasing due to the ongoing spring meeting in DC, but that it started on April 5, more than seven working days after board approval. The delay in publishing program documents was confusing, to say the least.
On the other hand, if the government decides to ‘renegotiate’ this commitment, it risks setting the stage for another balance of payments crisis in a year or two. The fiscal deficit has been set higher than 7%, and the trade deficit is growing faster than exports and monthly remittances. If they decide to pump up growth in the upcoming budget, as Hammad Azhar has tweeted, it will accelerate this and create another new deficit. In this case, the government can make history by becoming the first government to face two balance of payments crises in one period.
This is not the enviable crossroads they face today, and how things go with the IMF is critical to how the political scene will develop.
The author is a business and economics journalist.
Published in Dawn, April 8, 2021
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