That is, after all, where the money comes from
It has been quite a show for the finance ministry recently. Never mind the economy, note the economics. Sure, we missed a condition here and there – like the gas levy and interest rate adjustment – that came with the IMF’s Extended Fund Facility (EFF) last September, which probably saved us from default. But there was some exquisite financial diplomacy at display, followed by very generous billion-dollar-plus gifts from the world’s most powerful petro sheikhs. And suddenly the economy was fine, the second EFF review was successful, and another $555.6m was on its way.
But Dar sahib has dealt with the Fund before and must understand well by now how its conditionalities take effect. The review may have been polite, but whenever there is a programme on, the international market takes cue from the IMF, not the country’s statistics. And continued failure to meet its demands will make floating bonds very difficult and attracting foreign investment near impossible. For starters, it will be hard to fight off an interest rate uptick much longer, even if it is meant more to curtail the government’s borrowing than to arrest inflation. There is no justification for the soft position any longer. The borrowing binge continues as before, and private sector crowding out has long ruled out economic expansion, employment multiplier, etc. And if the central bank finds some autonomy in the process, then that is one more condition met.
The rupee, too, seemingly holding at agreeable levels for the ‘N’ leadership, is actually very shaky. The dollar is the international reserve currency, after all, and safe haven of choice for a bulk of international investors in times of risk aversion. And since Russia’s adventures in Crimea have swung the market pendulum from risk to fear, this safe haven trading will strengthen the greenback just as other risk currencies have begun appreciating, a fact Dar sahib’s team no doubt appreciates well enough. Just like it understands GCC funds parked in the State Bank’s vaults is actually quite illusory. Strange as it sounds, reserves represent the government’s ability to raise or attract monies – the face of a continuous cycle. And unless the gifts are a recurring facility, there is little to be happy about. The effects will wear off soon enough.
To be fair, the Fund’s requirements and conditions have created controversies wherever its structural adjustment programmes have gone. But there is little economies like Pakistan can do to justify their concerns, especially when they are still without a viable mechanism for controlling earnings and expenses. All means of raising the nation’s income are suspect and for far too long the state has found borrowing the best option, even for its day-to-day expenses. Some of the Fund’s prescriptions will have to be followed to ensure all tranches of the $6.78b EFF, otherwise this too will wear out sooner rather than later. In a way Dar sahib is right: the rupee needs to be stable and the reserves must swell. But if he goes about it in a way that a stronger economy achieves these targets instead of mysterious gifts, everybody will be the better for it.
