IT begins innocuously enough: “[t]he economy is showing signs of improvement”. Programme performance was “mostly positive”, the balance of payments is “improving, but remains delicate”. Reserves have also improved, although their position “remains insufficient” covering only two months of imports.

The IMF’s third review of its ongoing programme with Pakistan gives a fairly balanced picture of the economy, bowing deeply to political sensitivities yet finding a way to get its point across.

Besides security, the big threat to the economy is a rather mundane one: “slippages in policy implementation” and other delays in making key decisions. Conversations with business people here in Karachi have also revealed that one common concern is the weak ownership that this government is bringing to the reform process, the delays in making crucial decisions, the refusal to fill key positions like boards of important public-sector enterprises or regulatory bodies, or filling these posts stealthily, on the sly.

This is a major problem and it only leaves one wondering what the reason could be. Are they scared of appointing somebody with an independent mind? Do they prefer running things through people serving in a temporary and acting capacity since they are more likely to obey instructions? If so, then the Fund is right to flag “slippages in policy implementation” as the lead risk to growth since the reform path that lies ahead requires growing participation by private-sector professionals in turning things around.

The IMF’s third review of its ongoing programme with Pakistan gives a fairly balanced picture of the economy.
The other big theme that comes up in discussions with investors and business leaders is the ad hoc nature of decision-making, as well as the cliquishness of the government leadership. “One never knows where things stand with them,” says one such leader from the business community in Karachi. “A minister will make a commitment then find himself unable to deliver.”

Another theme that keeps coming up is the growing engagement with China, and the space being given to the Chinese government and quasi government entities to come into Pakistan’s economy. “What will happen to existing players?” asks one leader with deep links to manufacturing, particularly for the domestic market. A comprehensive review ought to be done, these people argue, of the Free Trade Agreement that Pakistan signed with China to determine what impact it has had on Pakistan’s economy. “There is no clear policy on trade,” he says, going on to add that “trade is linked to other issues”.

Other issues in this case could be geopolitics or simply emotion. The only trade policy Pakistan has ever really had has been asking for concessional market access from the US and the European Union.

The weak ownership of any domestic policy agenda, and the repeated trips to China and signing of one MoU after another the terms of which are not known to anybody, is creating unease amongst business leaders.

But coming back to the Fund report, it gets more interesting a little further down. For instance, when discussing the fiscal situation, there is a small paragraph on government borrowing that notes a decline in banks’ participation in treasury bill auctions, arguing that “banks may require higher returns to cover fiscal financing needs, and may call for a revised debt issuance policy to accommodate such higher yields”.

This is a little puzzling, and since the Fund opts to simply leave the matter at that, we are left guessing as to what they were really trying to get at here. Is this a veiled suggestion to raise interest rates to reignite bank appetite for shorter tenor T-bills? And what sort of revisions does the Fund think will be necessary in the debt issuance policy to “accommodate such higher yields”?

What makes this statement a little more puzzling is that in the preceding sentence, the report says that “[s]taff discussed with the authorities implementation of recommendations in the new Medium-Term Debt Strategy”. And of course, one of the recommendations of this MTDS is precisely to shift borrowing away from T-bills towards Pakistan Investment Bonds, so now that that is happening why does the Fund feel that revisions to the strategy might be required?

In key portions, the statement stops short of saying something important. In another place, for instance, it mentions a “significant shortfall” in April’s revenue collection target, without saying much about how significant, except to say that “staff expect revenue will be quarter percentage of GDP lower than envisaged”. That’s a fairly sharp dip, especially considering the revenue target has already been revised downward twice.

“[T]he authorities do not share staff’s view that the exchange rate is somewhat overvalued, and place greater priority on the nominal exchange rate stability,” says the Fund, betraying signs of debate over the nature and impact of the inflows that have buoyed reserves. “[S]taff suggested that the[State Bank of Pakistan] should not bet on one-offs [sic] inflows”, urging the authorities to allow the rupee to fall and interest rates to rise. Clearly the Fund did not prevail in this debate. We can expect to learn a little more about this in the State Bank’s third quarterly report that is scheduled to be released any day now.

Many of the structural reforms the government has committed to are massive in nature. Withdrawal of exemptions in the taxation regime to unbundling of gas distribution infrastructure to privatisation, all require that a strong guiding hand be visible at this stage. If the government is serious about implementing any of these commitments, we should be seeing some very major movement very soon.

“As crisis risks begin to ease, there may be renewed pressure to slack off on politically sensitive reforms,” warns the Fund. As per many of the voices from the business community, signs of slackening off are already manifest.