IMF's double-edged rescue for Pakistan
QUETTA, Pakistan - The decision of the International Monetary Fund's executive board on Monday to approve a US$7.6 billion credit to Pakistan to stave off a balance of payments crisis reduces for the time being the prospect of Islamabad defaulting on its foreign debts.
In the IMF's first rescue in Asia since the beginning of the current global financial crisis, Pakistan will get between $3.5 billion and $4 billion as a first tranche, which is likely to be transferred to the country's central bank's account in the US Federal Reserve in New York. Cash-strapped Pakistan will have the money by Thursday, as the disbursement takes 48 to 72 hours.
Analysts believe that the rapid disbursement has the support of the US government, which wants to help Pakistan arrest its economic deterioration as soon as possible. Its precarious financial situation has caused widespread alarm due to Pakistan's role as a key ally in the US-led "war on terror" and its position as the Islamic world's only nuclear power.
Local analysts are, however afraid of the harsh conditions linked to the IMF loan and believe these conditions could convert the financial mess into a political crisis.
The credit will "support the country's economic stabilization program", the IMF said in a brief statement. The country's foreign exchange reserves shrunk just short of $100 million to $6.64 billion during the week ended November 15. Reserves held by the central bank declined in the week by $37.1 million to $3.459 billion.
The IMF cash may help the nation overcome a "crisis of confidence"' and improve its debt rating, Bloomberg reported, citing Asian Development Bank managing director Rajat Nag.
A rescue plan "could have the advantage of presenting an opportunity to force countries like Pakistan to come to grips with entrenched structural distortions in its economy", Dawn newspaper reported, citing a joint article from Washington's Middle East Institute by Wendy Chamberlin, the former US ambassador to Islamabad and former IMF economist Zubair Iqbal.
The Pakistani rupee ended firmer on Monday on expectation of the IMF giving the go-ahead for the stand-by arrangement, according to local currency dealers.
The rupee rose 1.3% last week to 79.29 per US dollar, touching 79.15 on November 19, the highest since October 10, after strengthening from a record low of 83.55 on October 17, according to Bloomberg. The rupee plunged in October as the balance of payments deficit in the three months from July 1 widened to $3.95 billion from $2.27 billion a year earlier.
Even so, the loan will not extend long-term help to the currency market, as one IMF condition is that the aid cash will not be used in the currency market, according to the local currency dealers. The rupee would only stabilize in the long term when there is an improvement in inflation and the current account deficit, according to the analysts.
The government is being strongly criticized for succumbing to IMF conditionalities even before the release of the bailout funds. Before approval of the loan, the IMF had called for measures including withdrawal of a wide range of subsidies by the end of the fiscal year ending next July 1, barring the central bank’s intervention in the foreign exchange market, and imposition of an agriculture tax.
Pakistan had to go to the IMF for the unpopular stand-by agreement to avert an economic meltdown because the government suffered a "trust deficit" which did not allow it to use other options with success, the Dawn reported, quoting a Finance Ministry official. Local businessmen and industrialists have strongly opposed the recent rise in the central bank's discount rate, the highest increase in more than a decade and one seen as being linked to the IMF deal.
Pakistan’s industrial landscape may soon be marked with dead and sick units and there will be massive unemployment because of the devastating impact on businesses of the higher cost of bank loans arising from the interest rate increase, according to Anjum Nisar, the president of Karachi Chamber of Commerce and Industry.
The IMF conditions have not yet been made public, but local media reports have suggested the terms may be almost impossible to implement in Pakistan.
"If Pakistan accepted the IMF funding, it would have to reduce the defense budget by 30% between 2009 and 2013 and would reduce the number of posts entailing pensions in the government and semi-government departments from 350,000 to 120,000," The News claimed last month.
According to the report, the loan terms would include the fund's intervention in central bank affairs, provision to the IMF of details of foreign exchange reserves, remittances and flow of foreign exchange through commercial banks, the imposition of a 7% tax on wheat production and a 3.5% levy on other crops, and IMF monitoring of preparations of the federal budget.
"The Pakistan government will have to provide details of loans it got from all other lenders, including China, 48 hours before signing the funding agreement with the IMF, and 25% of the government assets pledged as securities for such loans will be the property of the IMF," the report said.
Subsidies for power, gas and petroleum products will be eliminated by next July, according to the Business Recorder. This condition will be particularly tough if it is applied to agricultural inputs, as at present the government provides a subsidy of 32 billion rupee on fertilizers. The government will have to burden the people, especially the poor, to meet the IMF demands, the Business Recorder said.
Among other terms believed to be included in the IMF deal is an increase to 15% in the ratio of tax to gross domestic product. The government would have to increase indirect taxes, instead of direct taxes, which would hit the general public as the ratio of general sales tax may have to be increased, the Business Recorder report said.
Parliamentarians on both government and opposition sides have said they will strongly resist any move to tax agriculture, saying every farmer will come out on the streets against such a move after high diesel and other input costs have already made it hard to survive. The legislators claim an IMF deal is tantamount to making the country hostage to the global market.
Democratic governments in the 1990s failed to meet demands under an earlier IMF deal to levy an agriculture tax. "If Pakistanis once again fail to impose an agriculture tax, this will be the last IMF program they will have," Dawn reported one analyst as saying.
Low-income workers and the unemployed are already battling soaring prices, with year-on-year inflation according to the sensitive price index (SPI) hitting 29.02% during the week ended November 20.
Other data for the economy are as grim or grimmer. The current account deficit widened 98.5% to $5.943 billion in the July-October period compared with a year earlier, according to the central bank. The oil bill during the period jumped 93% year on year to $4.92 billion and the food bill surged 77% to $1.58 billion.
The imbalances are rising despite the recent steep fall in global prices of oil and food.
"No one could deny the fact that the conditions linked to the IMF package may be terribly harsh, but the fund's team monitoring disbursements will have a strict check on 'royal spending linked to the lavish living of a few at the top'," Dawn reported, citing a local analyst Hasnain Asghar Ali.
Another analyst, Ashraf Zakaria, said: "Although the IMF credit line has allayed fears of a possible default on foreign debt repayments, its fallout on the economy amid further increases in the discount rate and taxes could well prove a double-edged weapon. both for the financial and the corporate sector."
Syed Fazl-e-Haideem [email protected], is a Quetta-based development analyst in Pakistan. He is the author of six books, including The Economic Development of Balochistan, published in May 2004.