IMF’s hard bargain

The serving Pakistan Democratic Movement (PDM) government’s options on extending swift relief to the masses are drying up faster than thought. Through make-or-break negotiations, the International Monetary Fund (IMF) has made clear that scrutiny will extend to every subsidy and every ministry record of value. All this effectively challenges the same coalition’s push to establish a superior standard of governance than its predecessor.

The current scramble to effect some sort of cushion on export, fuel and energy subsidies reinforces that point even further. But the fear is that critical IMF funding will arrive with a political cost that no amount of public diplomacy or media rhetoric may sell as acceptable.

The divisions between the IMF and government, particularly over Pakistan’s fiscal gap data at present, suggest a grim reality: that the process for releasing more than $1 billion in funds is at a loss for agreed upon methodology as well. It is a clear fact that sustained hikes in tariffs and taxation may bring both sides closer to a delicate arrangement for green-lighting the funds, but there is a lack of sustainability about these hikes, especially with double-digit inflation already keeping the government’s options on relief firmly tethered.

From a political perspective, the PDM’s meta-narrative on reform was fuelled in part by the promise of steering the economy into the clear. One of its underlying assumptions was that a mysterious remedy to cure Pakistan’s fiscal adjustments was known to the PDM beforehand, and presumably lost on its predecessor. Many months on, that rhetoric has confronted reality with a rude awakening.

Dwindling foreign exchange reserves can no longer be explained away as a negligible problem, as attempted in the recent past by select ministers and officials. The IMF is also willingly driving a hard bargain by overlooking the sustainability aspect of key suggested measures, such as added taxation measures and a push to cut into Pakistan’s expenditure side. All of this to limit the primary deficit at all costs. “[The] IMF agreement has tied our hands. Even if we want, we cannot give relief at present,” said PML-N vice president Maryam Nawaz recently. To many in the country, this carries all the characteristics of a “U-turn.”

All major parties with an equal stake in Pakistan’s recovery prospects ought to realize the delicate nature of IMF’s demands. Without biting the bullet, Islamabad is looking at about $3 billion in foreign exchange reserves that keep even three weeks of import coverage out of reach. On the other hand, proceeding with an IMF arrangement is a recipe for widespread protest. The moment Islamabad’s heavily subsidized fuel, gas and electricity are forced into a painful turnaround, the government will be compelled to move in sync with its original IMF consensus. How this plays out in the mind of a common Pakistani is anyone’s guess.

The latter is important to illustrate how the ninth review of IMF talks prove to be a double-edged sword. Avoiding default may save Pakistan from ‘defaulting against’ commercial debt. But it can also take away the government’s long-sought margins to manoeuvre between price spikes and relief measures of its own choosing. The process of negotiation between the PDM and IMF suggests that the latter is acutely aware of the government’s fiscal constraints, and will not budge from sweeping recommendations that are ill-suited to a country with slashed growth and massive flood recovery.

The added admission from the top that the IMF was “combing every book” during the ongoing negotiations weakens the impression that the PDM could never see this coming. Until recently, this was the dominant narrative at the centre, but a mixed history of honouring IMF commitments makes access to critical funding an exercise in losing leverage. Inflation is already up 27.5 per cent year-on-year in January, and identifies as a 48-year high alongside supply shortages. The fear is that regardless of the direction that IMF talks take, the serving PDM government will once again get locked into a cycle of contention with the former administration on the nature of terms initially agreed, bringing its own relief contradictions to light.

Understand that the absence of meaningful structural reform in Pakistan has opened the door to a hard fiscal bargain at present. For instance, sufficient controls on government spending in Pakistan are yet to come to the fore, and a coordinated push to raise revenue hasn’t been structurally enduring. The result of lax structural reforms through prior IMF engagements is seen in limited safeguards against the rupee, which declined by almost 15 per cent last month, the biggest monthly slump in over three decades.

All this shatters the myth that a single finance minister’s actions could serve as a silver bullet for Pakistan’s economy. Now the entire coalition government finds itself stacked against a wall that it claimed was a one man mission. As donor support faces further headwinds amid recession risks, there is little denying the constraints that are drawing Pakistan towards the IMF, and sinking the regime’s political capital in the process.

The writer is a foreign affairs commentator and recipient of the Fulbright Award