Ailing Pakistan needs bitter IMF medicine

KARACHI (Reuters) – Pakistan needs funding from the International Monetary Fund (IMF) in order to get its economy back on track after problems were ignored during a transition to civilian rule this year, a former central bank governor said.

IMF Managing Director Dominique Strauss-Kahn said on Wednesday Pakistan had requested financial assistance and talks on a loan program would begin soon, but the prime minister’s top economic adviser said on Thursday Pakistan had yet to formally requested a facility.

Ishrat Husain, who headed Pakistan’s central bank between 1999 and 2005, told Reuters the country needed IMF help.

“When the economy is ailing, you go to the IMF, and IMF prescribes you some bitter prescriptions which you have to swallow in order to become healthy,” Husain said.

“It’s not that you need an IMF program as crutches but you need the IMF program in order to get back on track.”

In 2000, Pakistan entered a nine-month stand-by agreement with the IMF and in 2001 it negotiated a three-year poverty reduction growth fund program. It completed that program within the period and did not take up the last two tranches.

Husain said an IMF agreement was a prerequisite for any debt rescheduling and Pakistan could have avoided going to the IMF for funding had it managed the economy better from the beginning of 2007, particularly in terms of reducing unsustainable subsidies.

“We chocked off the entire payment system of the country and then the transition from the previous government to this government was not managed well,” said Husain.

The economy was ignored during this transition with drawn-out political wrangling distracting attention, he said.

“We decided to give more importance to narrow political considerations rather than sound economic management which has landed us in trouble,” Husain said.

FEELING THE PINCH

The lesson to be learnt was that the economy could not be used for narrow political purposes, he said.

Husain said a key factor of an IMF program would be controlling the fiscal deficit so it did not exceed 4 to 4.5 percent of gross domestic product.

Other main points were likely to be reducing the current account deficit, keeping interest rates in line with the real interest rate regime and an exchange rate determined by the market.

Pakistan is facing inflation close to 25 percent, a balance of payment crisis draining foreign reserves by $1 billion a month. With no external funding, analysts said the country had to turn to the IMF.

Husain did not see any problem with the content of IMF programs but conditions posed a problem as there were quarterly reviews and very specific targets.

“So it is the conditionalities and how those conditionalities are enforced, that I think is the question, not the substance or the content of the reform measures that are needed,” he said.

Husain did not see ordinary Pakistanis bearing the brunt if a safety net was put in place for the poor and those on fixed incomes.

“The business community, the industrialists will feel the pinch because of adjustments in interest rates, and growth will be slower than before,” said Husain.

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