However, the present government is not sure whether there should be a new programme before March, 2013 or after June, 2013. It is very clear, nonetheless, that Pakistan has to come up with firm numbers to enlarge the tax base and reduce budgetary deficit before asking for such a favour. The fiscal managers feel that earlier the programme, less stringent will be the conditionalities and vice versa. They don't want to repeat the experience of 2007 when harsh conditionalities had to be accepted as the balance of payments (BoP) position had eroded rapidly due to postponement of sound economic decisions.
The optimism of Pakistani side seems to have been bolstered by their recent interaction with the Fund staff in Washington. The impression during the deliberations was that if there was to be a programme, the IMF would favour reasonable adjustment and avoid upfront imposition of harsh conditions. According to informed sources, the Fund listened to the Governor SBP and the Chairman FBR for the trend in foreign exchange reserves and plans to enlarge the tax base but no numbers were discussed. The overall mood was that it was Pakistan that had to select options and come up with firm numbers for stabilizing the economy. In particular, Pakistani side had to explain its strategy to lower the circular debt and provide clarity on how subsidies will be reduced and tax-to-GDP ratio improved.
Although, there is still some confusion and uncertainty about the size and the kind of arrangement Pakistan would like to have with the Fund in the next few months but we feel that overall approach of the economic managers of the country is well directed and their efforts to deal with the unfolding crisis are well-timed. As the clock is ticking away, foreign exchange reserves held with the SBP are declining almost consistently, without any hope of reversal in this trend anytime soon.
The position could worsen due to heavy repayments to the IMF because of previous SBA facility availed by the country or some other negative exogenous developments. Of course, Pakistan is expecting $600 million from CSF and an unspecified amount from the sale of G3 licences, but such receipts would be insufficient to cover the foreign exchange gap due to widening BoP deficit. There is no doubt that an earlier recourse to the IMF and conclusion of an agreement before the onset of a crisis would be preferable. Experience suggests that more bitter medicines are always prescribed if the disease is at an advanced stage.
Also, this is the right time to re-initiate negotiations with the IMF due to recent strengthening of the country's relationship with the US and other European countries who have overwhelming quotas in the Fund and, therefore, could influence its policy to a certain extent. Besides, IMF would like to conclude a programme while an elected government is still in place for obvious reasons.
Once Pakistan successfully concludes a programme with the Fund, other multilateral institutions and bilateral donors would also feel confident about economic management of the country and could be more responsive in their dealings. We would, therefore, urge upon the political leadership of the country to accord highest priority to the economic imperatives of the country and care less about political considerations. Even if hard conditionalities have to be agreed with the Fund, their actual impact is not likely to be felt during the remaining tenure of the present government.
However, to expect that IMF would refrain from imposing harsh upfront conditionalities and favour a reasonable adjustment would be an overoptimistic proposition. The Fund has learnt by experience that Pakistan usually backs out on its promises and asks for waivers on one pretext or the other and, as such, it is better to prescribe prior actions before finally agreeing to a programme.
Such a contention is also borne out of the fact that IMF's Executive Board has used very harsh language in its Ex-Post Evaluation of Exceptional Access under the 2008 SBA with Pakistan in the last week of November, 2012. Therefore, the IMF staff might have listened to the assessment of Pakistan's economy by its economic managers with some degree of sympathy in the latest meeting but such a reasonable attitude does not necessarily mean that they have accepted our prognosis and are prepared to cooperate on our terms. Their actual response would only be forthcoming at the right time.