Democracy dividend, no more


Pakistan is faced with a whopping financing gap of $10.8 billion and the International Monetary Fund’s lead donors – the US and European countries – are in no mood to accept the fact that Pakistan is in need of help.

It is fighting a war with terrorists who are opposed to the Western way of life in North Waziristan. In addition, the recent flooding has caused immense damage to both cash crops and country’s infrastructure. As a result of which, the country is witnessing thousands of displaced citizens; while the PML (N) government in power is facing difficult options to meet the Fund’s conditionalities due to a political crisis that largely emanates from the sit-ins at Islamabad’s D-Chowk.

A press conference was held in Washington by Finance Minister Ishaq Dar. Some IMF representative, who usually accompanies the finance minister of Pakistan on such occasions, was however, conspicuous by his absence. The Fund merely released a statement, stating that it has agreed to combine the fourth and fifth reviews in early December which could make available two tranches totalling approximately US $1.1 billion.

However, if a strategy is agreed between the government and the Fund’s staff and 4th and 5th tranches are disbursed by December; even then huge obstacles are expected in the 6th review and that may result in termination of the programme without achieving the objectives envisaged.

In the budget for the current financial year around two billion dollars were to be raised from the commercial bond market; another two billion dollars from privatisation proceeds; 2.2 billion dollars from the IMF itself; and another billion dollars were to be obtained from multilateral agencies such as the World Bank and Asian Development Bank.

Without issuance of a letter of comfort or a certificate of good behaviour from the Fund, multilateral donors would not be willing to disburse the project-related funds. It is becoming quite clear that the US government is no more willing to give Pakistan another democracy dividend and wants Pakistan to put its fiscal house in order to the satisfaction of the Fund’s staff, of course.

What are the options for Pakistan in the current scenario? Is it back to 1998? Dar needs to be freed from protracted political negotiations with the opposition to undertake electoral reforms; he must be allowed to concentrate on the fiscal emergency Pakistan is faced with.

At present, the Finance Minister is heading as many as 55 committees. He needs to recuse himself from continuing to chair political committees and instead concentrate on the targets agreed with the Fund and ensure that the fourth and fifth reviews are successfully undertaken.

PML (N) appears to be banking on 6.6 billion worth of imported coal projects to alleviate the power shortage, correct the energy-mix and replace furnace fuel oil with imported coal. The return on investment offered to the Chinese investors is beyond the capability of Pakistan to service every year. Let us not jump from the frying pan into the fire. All factors need to be taken into account before finalising the next move.

Similarly, the litigation with regard to OGDCL is not helpful nor are the courts able to lend a helping hand to the government on a highly controversial Gas Infrastructure Development Cess. Pakistan is in a state of political turmoil. It will have to offer a risk premium to overseas investors in its bluechip company if it wants to broad-base the foreign ownership.

This means a heftier discount on the 10 percent OGDCL shares being offered. And, could also end up paying higher interest rate on Sukuk bonds scheduled to be offloaded. It is quite clear that a political feud with the opposition involved in the sit-ins is having a detrimental effect on the country’s already frail economy and it needs to be resolved urgently. A shortfall in external inflows will force higher domestic borrowing.

In case the present turmoil is not resolved – the economy could head for a collapse. Heavy Indian firing alongside the Working Boundary and the Line of Control is an indication that the United States of America and India are perhaps on the same page with regard to Afghanistan’s future.

In the recent past, Pakistan’s Finance Minister was able to meet the then Under-Secretary of Treasury David Lipton, in Washington, at the annual gathering; and seek the US help on the Fund’s board. The then US Treasury official also helped in quick disbursement of Coalition Support Fund and release of funds under the Kerry-Lugar Bill (worth 7.5 billion dollars due to expire in 2015).

Not only is Pakistan now squeezed from both sides; it also seems to be imploding from within. This is indeed a highly critical situation. The government must resolve this ongoing political turmoil in an effective and meaningful manner without any further loss of time or else seek a fresh mandate through mid-term polls. Such a strategy could bestow upon the elected government the vigour or strength that it desperately needs to negotiate with the Fund with a measure of new-found legitimacy.

Recorder Report

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